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How FedEx Is Valued among Peers before Fiscal 2Q18 Earnings

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FedEx’s e-commerce ambitions

FedEx (FDX) seems to be banking on the e-commerce boom in the United States and around the globe. The company’s e-commerce related deliveries are ~10% of retail. With fast-growing e-commerce, FDX has been investing heavily in its ground network. Currently, its networks rely heavily on the B2B (business-to-business) side of its business.

In addition to its heavy investments in technology and the hub-and-spoke network, FedEx is also aiming to grow inorganically. The TNT Express acquisition could give it a strong foothold in the European markets. However, the recent cyberattacks on TNT’s IT (information technology) system could offset the expected synergies in the form of lower operating costs in Europe.

Valuation multiple

To compare FedEx with its peer group, we’ve used the forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple. That multiple suggests how a company is valued for each dollar of EBITDA it’s anticipated to earn.

Valuation implies a strict apples-to-apples comparison. So FedEx’s valuation can be compared only with archrival United Parcel Service (UPS) in a true sense. We’ve also considered other LTL (less than truckload) carriers (XLI) such as XPO Logistics (XPO), Old Dominion Freight Lines (ODFL), SAIA (SAIA), and YRC Worldwide (YRCW). XPO operates in North America and Europe, and YRCW’s operations are confined to North America.

FedEx and peer group valuations

As you can see in the above chart, YRCW’s forward EV-to-EBITDA multiple of 4.8x is the lowest in the group. That’s due to operating level losses incurred by the company in the past. The stock is also highly volatile among LTL players.

Next is FedEx with a multiple of 8.7x. Its operating margins are low, only above YRCW. FedEx’s operating margins are 8%–10%, whereas UPS has higher operating margins of 11%–13%.

ODFL has the highest ratio of 13.6x in the peer group. That can be attributed to having the highest operating margins among its peers. SAIA and XPO have forward EV-to-EBITDA multiples of 10.4x and 10.1x, respectively.

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