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Date:  2-­‐22-­‐2014  

        Analyst  Name:  Ian  McCauley  &  Taylor  Yotz  

CIF  Stock  Recommendation  Report  (Spring  2014)  

Company  Name  and  Ticker:  FedEx  Corp.  (FDX)  

Section  (A)  Investment  Summary  

Recommendation  Buy:              Yes                  No   Target  Price:  $145  

Stop-­‐Loss  Price:  $115  

Sector:  Industrial    

Industry:  Integrated  Shipping  &  Logistics    

Market  Cap  (in  Billions):  $41.01  Billion  

#  of  Shrs.  O/S  (in  Millions):  3.16  Million  

Current  Price:  $131.35  

52  WK  Hi:  $144.39  

52  WK  Low:  $90.61  

EBO  Valuation:  $82.09  

Morningstar  (MS)  Fair  Value  Est.:  $137.00  

MS  FV  Uncertainty:  Medium  

MS  Consider  Buying:    $95.90  

MS  Consider  Selling:    $184.95  

EPS  (TTM):  5.23  

EPS  (FY1):  $6.99  (May  2014)  

EPS  (FY2):  $8.94  (May  2015)  

MS  Star  Rating:  3  Stars  

Next  Fiscal  Yr.  End    ”Year”:            “Month”:  2014,  May  (05)  

Last  Fiscal  Qtr.  End:  Less  Than  8  WK:      Y                N  

If  Less  Than  8  WK,  next  Earnings  Ann.  Date:  N/A  

Analyst  Consensus  Recommendation:  2.10  -­‐  Outperform  

Forward  P/E:  14.06  

Mean  LT  Growth:  15.21  

PEG:  0.8  

Beta:  1.45  

%  Inst.  Ownership:  80.48%  

Inst.  Ownership-­‐  Net  Buy:      Y              N  

Short  Interest  Ratio:  5.20  

Short  as  %  of  Float:  4.10%  

Ratio  Analysis   Company   Industry   Sector  

P/E  (TTM)   26   17.42   25.53  

P/S  (TTM)   0.94   0.41   1.95  

P/B  (MRQ)   2.45   1.08   2.07  

P/CF  (TTM)   10.34   2.88   10.06  

Dividend  Yield   0.44   1.92   1.92  

Total  Debt/Equity  (MRQ)   17.05   42.09   70.37  

Net  Profit  Margin  (TTM)   3.39   2.04   7.90  

ROA  (TTM)   5.10   2.25   5.08  

ROE  (TTM)   10.0   5.15   11.05  

 

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Investment  Thesis    ●  We  recommend  that  the  Cougar  Investment  Fund  invest  in  Fedex  Corp.  (to  be  referred  to  as  “FDX”)      ●  Morningstar’s  analysis  reveals  that  FDX  is  currently  undervalued  -­‐  currently  priced  at  $131.35,  but  it  is  estimated  at  $137.00.  Furthermore,  Morningstar  expects  to  increase  its  fair  value  estimate  in  the  future.        ●  FDX  is  subject  to  cyclical  trends  and  consumer  buying  patterns.  This  is  a  positive  thing  for  this  stock;;  online  shopping  is  expanding  and  the  Industrial  sector  -­‐  of  which  this  stock  belongs  -­‐  is  showing  sluggish,  but  steady  growth.      

  ●  FDX  is  shielded  by  very  powerful  barriers  to  entry.  FDX  is  capable  of  handling  most  types  of  shipping,  which  requires  a  massive  international  shipping  network  and  is  difficult  and  costly  to  replicate.  DHL,  a  worthy  competitor,  was  forced  to  leave  the  US  parcel  market  in  2009.      

    ●  FDX  is  subject  to  fuel  price  shocks  and  

global  economic  cycles  -­‐  both  of  which  are  expected  to  be  favorable  in  the  coming  future.

Summary  Provide  brief  summary  of  your  analysis  in  each  section  that  follows  

Company  Profile:    FedEx  Corporation  provides  a  portfolio  of  transportation,  e-­‐commerce  and  business  services.  It  operates  in  four  business  segments:  FedEx  Express,  FedEx  Ground,  FedEx  Freight  and  FedEx  Services.  The  company  is  headquartered  in  Memphis,  Tennessee.    Fundamental  Valuation:    The  fundamental  (EBO)  valuation  revealed  results  that  differed  greatly  from  reality.  The  EBO  valuation  showed  that  FDX  is  extremely  overvalued,  however,  manipulating  the  inputs  revealed  results  that  were  more  inline  with  analysts  projections.  Due  to  the  strong  consensus  amongst  analysts,  we  believe  that  there  were  significant  flaws  in  our  EBO  valuation,  which  led  to  misguided  results.    Relative  Valuation:    As  stated  previously,  this  industry  has  very  barriers  to  entry.  This  means  that  FDX  has  only  one  true  competitor  in  the  S&P  500,  UPS  (United  Parcel  Service).  UPS  and  FDX  have  very  comparable  multiples  and  commonly  outperform  the  other  included  competitors  by  several  multiples.  Unfortunately,  there  was  a  lack  of  available  data  for  some  of  the  ratio  calculations  in  this  report.    Revenue  and  Earnings  Estimates:    FDX  has  not  consistently  beat,  met  or  misses  estimates.  The  success  of  quarterly  earnings  reports  vary,  however,  the  stock’s  price  remains  on  its  course  of  steady  appreciation.  This  speaks  volumes  to  the  sentiment  that  investors  and  analysts  have  in  this  company.    Analyst  Recommendations:    Consensus  among  analysts  is  mixed.  We’ve  seen  a  variety  of  upgrades  and  downgrades  without  any  consistent  pattern.  Overall,  this  outlook  on  this  stock  has  remained  positive.  This  positive  outlook  is  held  despite  the  aforementioned  struggles  in  earnings  and  revenues.  

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Institutional  Ownership:    FDX  stock  is  largely  held  by  mutual  funds  and  institutions.  To  be  precise,  the  stock  is  80.48%  owned  by  institutions.  We  have  seen  a  net  sell  lately,  but  this  is  relatively  small  and  there  is  still  a  very  strong  institutional  ownership.  Short  Interest:    Short  interest  numbers  have  been  relatively  steady,  but  high.  FDX’s  short  interest  numbers  are  above  those  of  the  company’s  competitors  and  they  reflect  a  bearish  sentiment  in  this  arena.  Stock  Price  Chart:    The  charts  are  very  positive  for  FDX.  In  the  short-­‐timeframe  charts,  we  can  see  some  issues  where  the  FDX  stock  (along  with  UPS)  took  a  dip,  but  we  have  seen  a  steady  recovery  from  that.  Overall,  we  see  a  stock  stock  performance  that  consistently  outperforms  XLI  and  the  S&P  500.  Furthermore,  the  stock  charts  confirm  the  cyclicity  of  this  stock  -­‐  movements  between  the  stock  and  the  indices  typically  match  and  slightly  exaggerated.  

 

   

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Section  (B)   Company  Profile    

(B-­‐1)  Profile    “FedEx  Corporation  provides  customers  and  businesses  worldwide  with  a  broad  portfolio  of  transportation,  e-­‐commerce  and  business  services.  With  annual  revenues  of  $44  billion,  the  company  offers  integrated  business  applications  through  operating  companies  competing  collectively  and  managed  collaboratively,  under  the  respected  FedEx  brand.”  -­‐  FedEx  FDX’s  business  model  is  based  on  its  pioneering  of  overnight  delivery  and  focuses  on  express  delivery  or  small  parcels.  Additionally,  FDX  provides  shipping  and  document  solutions  for  businesses.  FDX  is  comprised  of  four  main  business  units:  FedEx  Express,  FedEx  Ground,  FedEx  Freight  and  FedEx  Services.  FedEx  Express,  FedEx  Ground  and  FedEx’s  less-­‐than-­‐truck  operation  accounted  for  60%,  24%  and  12%,  respectively.  Margins  are  highest  on  FedEx  Ground.  FDX  is  most  sensitive  to  fuel  price  shocks  (jet  and  diesel  fuel)  and  global  economic  cycles.  A  prime  example  of  this  is  the  fact  that  the  company  operates  one  of  the  largest  airlines  in  the  world,  which  requires  significant  capital  expenditures  and  exposes  it  crude  oil  prices.  FDX  has  faced  oil  supply/price  issues  and  both  positive  and  negative  economic  cycles  without  major  issues.  FDX’s  founder,  Fred  Smith,  remains  at  the  head  of  the  company.  It  is  largely  considered  that  FDX  “acts  in  the  best  interests  of  shareholders  ...  [and]  in  line  with  that  of  other  large-­‐cap  transport  and  industrial  companies.”  (MS)  FDX  has  not  had  any  significant  mergers  or  acquisitions  since  Kinko’s  over  a  decade  ago.  Currently,  there  is  pending  litigation  between  New  York  City  and  FDX.  FedEx  has  also  encountered  headwinds  in  Russia,  which  is  requiring  increased  paperwork  and  customs  regulations.      (B-­‐2)  Revenue  and  Earnings  History  (Refer  to  the  guidelines  document  for  revenue  and  earnings  data  to  be  included)  

When  considering  the  yearly  total  revenue  over  the  last  five  years,  it  is  apparent  that  FedEx  has  seen  consistent  growth.  There  was  a  slight  depression  of  total  earning  in  2010  -­‐  likely  attributable  to  the  economic  downturn  on  the  time  -­‐  but  this  was  clearly  readily  recovered  from.  Furthermore,  their  business  is  largely  consistent  with  a  few  seasonal  spikes,  but  their  revenue  remains  largely  consistent.  Similar  to  the  company’s  revenue,  its  earnings  dipped  during  the  economic  recession,  but  have  since  recovered.  Earnings  follow  a  similar  pattern  to  that  of  revenue,  however,  this  pattern  is  more  exaggerated.    (B-­‐3)  Most  Recent  Quarterly  Earnings  Release  

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FDX’s  most  recent  earnings  release  was  on  December  18th,  2013.  Despite  a  3%  rise  in  overall  revenue,  the  company  struggled  in  this  holiday  shopping  season  and  it  missed  the  expected  revenue  consensus.  The  consensus  amongst  28  analysts  was  that  earnings  would  be  $1.64,  and  FDX  missed  this  with  earnings  of  $1.57.  Despite  the  miss  on  both  earnings  and  revenue  expectations  -­‐  largely  attributable  to  the  difficult  holiday  shopping  season  -­‐  the  stock  still  performed  well,  which  shows  the  confidence  investors  and  analysts  have  in  this  company.  On  the  heels  of  the  December  18th  earnings  release,  the  stock  price  had  a  delayed  reaction,  but  climbed  nonetheless.    Section  (C)   Fundamental  Valuation  (EBO)  

 

Inputs  (provide  below  input  values  used  in  your  analysis)  

EPS  forecasts  (FY1  &  FY2):     $6.99  &  $8.94  

Long-­‐term  growth  rate:     15.21%  

***  Indicate  next  to  the  number  if  you  made  an  adjustment  to  the  consensus  LTG  estimate.  Justify  at  the  bottom  of  this  panel  how  you  derive  the  adjusted  value,  if  any  ***  Book  value  /share  (along  with  book  value  and  number  of  shares  outstanding):  

  Book  value:       $17,398.00  

  #  of  shares  outstanding:   318.00  M  

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  Book  value  /  share:     $54.711  

Dividend  payout  ratio:     11.15%  

Next  fiscal  year  end:       2014  (3-­‐31-­‐2014)  

Current  fiscal  month:       10  (February,  May  being  1)  

Target  ROE:         4.26%  

***  Indicate  next  to  the  number  if  you  made  an  adjustment  to  the  target  ROE  estimate.  Justify  at  the  bottom  of  this  panel  how  you  derive  the  adjusted  value,  if  any  ***  Discount  rate         12.11%  

Input  for  discount  rate:  

Risk-­‐free  rate:       3.69%  

Beta:         1.45  

Market  risk  premium:   9.5%  

Output  

Above  normal  growth  period  chosen:  2018  (5  years)  

***  Justify  at  the  bottom  of  this  panel  your  choice  of  abnormal  growth  period  ***  

EBO  valuation  (Implied  price  from  the  spreadsheet):  $82.09  

Morningstar  analysts  expect  revenue  to  grow  through  2018,  therefore,  we  consider  2018  as  the  proper  time  to  make  our  EBO  valuation.  We  believe  that  2018  (a  five-­‐year  investment  horizon)  will  yield  an  implied  price  of  $82.09.  

This  fundamental  valuation  is  well  below  the  stock’s  current  price.  Most  recently,  FDX  traded  at  $131.35  with  a  52-­‐week  low  of  $90.61.  This  means  that  the  EBO  valuation  is  not  only  well  below  the  current  price,  but  even  outside  of  the  52-­‐week  range.  

This  valuation  was  likely  flawed  and  contains  several  potential  “soft  spots.”  We  expect  some  soft  spots  to  be  due  to  the  fact  that  (1)  the  market  risk  premium  was  selected  ambiguously  and  is  likely  unrepresentative  of  FDX’s  true  position;;  (2)  that  FDX’s  beta  does  accurately  capture  the  expected  uptick  in  the  company’s  business  due  to  improving  economic  conditions;;  and  (3)  that  the  valuation  of  the  company  may  be  skewed  by  the  fact  that  its  fiscal  year  is  nearly  over.    

Sensitivity  Analysis  

1) Explain  the  input  values  used  in  sensitivity  analysis.  Compare  the  fundamental  values  obtained  here  in  relation  to  the  value  from  the  base  case    

2) Other  observations  worth  noting  

 

EBO  valuation  would  be  (you  can  include  more  than  one  scenario  in  each  of  the  following):  

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$88.42  if  changing  above  normal  growth  period  to  2020  (7-­‐year  investment  horizon)  

$93.33  if  changing  growth  rate  from  mean  (consensus)  to  the  highest  estimate  20.40  

$73.69  if  changing  growth  rate  from  mean  (consensus)  to  the  lowest  estimate  11.00  

$92.89  if  changing  discount  rate  to  11.00%  

Would  not  change  if  changing  target  ROE  to  in  any  way  

   

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Section  (D)   Relative  Valuation  

 

Due  to  the  very  high  barriers  to  entry,  FDX  only  has  one  competitor  in  the  S&P  500,  UPS  (United  Parcel  Service).  Evaluating  the  table  above,  you  can  see  that  FDX  and  UPS  are  similar  to  each  other,  while  the  other  included  competitors  are  clearly  quite  dissimilar.  FDX  and  UPS  have  the  most  comparable  ratios  in  all  categories.  The  other  companies  included  in  this  comparison  often  fall  short  by  several  multiples  when  compared  to  FDX  or  UPS.  Unfortunately,  the  information  needed  to  complete  a  thorough  comparison  of  value  between  FDX  and  UPS  was  not  available.  

 

 

   

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Section  (E)   Revenue  and  Earnings  Estimates  

(E-­‐1)     Copy/Paste  “Historical  Surprises”  Table  from  http://www.reuters.com/  ,  “Analysts”  tab  (include  both  revenue  and  earnings;  make  note  that  revenues  might  be  in  “millions”)  

 FDX  has  had  relatively  small  surprises  in  their  revenue  and  earnings  over  the  past  few  years  with  results  usual  coming  out  somewhere  around  the  analysis  estimates.  The  most  recent  surprise  was  that  their  Q2FY14  earnings  missed  estimates  by  4.31%,  however,  shares  from  the  company  did  not  take  much  of  a  hit  and  the  sentiment  is  good  for  the  next  earnings  report,  which  is  coming  out  in  March.  Overall,  FDX  has  seen  very  good  growth  over  the  last  two  years.  

(E-­‐2)   Copy/paste  “Consensus  Estimates  Analysis”  Table  from  http://www.reuters.com/,  “Analysts”  tab  (include  both  revenue  and  earnings)  

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 The  largest  divergence  can  be  seen  in  year  ending  FY2  especially  in  earnings.  LT  growth  rate  has  significantly  less  analysis,  which  is  probably  the  reason  for  having  such  a  large  range.  

(E-­‐3)   Copy/paste  “Consensus  Estimates  Trend”  Table  from  http://www.reuters.com/,  “Analysts”  tab  (include  both  revenue  and  earnings)  

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 For  the  most  part,  both  revenue  and  earnings  are  trending  down  over  a  month-­‐by-­‐month  period.  We  would  not  say  there  is  an  unusual  or  significantly  notable  difference  between  any  time  periods.  

(E-­‐4)   Copy/paste  the  “Estimates  Revisions  Summary”  Table  from  http://www.reuters.com/,  “Analysts”  tab  (include  both  revenue  and  earnings)  

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Over  the  last  four  weeks,  there  has  been  more  negative  revisions  for  revenue  and  earnings  than  positive  revisions.  Overall,  however,  there  has  not  been  that  many  revisions  made  -­‐  only  29  revision  made,  in  total.  There  have  been  no  positive  revisions  for  revenue,  but  we’ve  seen  three  negative  revisions  last  week  and  nine  in  the  last  four  weeks.  There  have  been  two  negative  revisions  for  earnings  in  the  last  week  and  nine  in  the  last  four  weeks.  Earnings  also  had  five  positive  revisions  over  the  last  four  weeks.  Overall,  we  would  say  the  trend  is  for  negative  revisions  especially  for  the  2014  periods,  but  results  are  mixed.  

(E-­‐5)   “Consensus  Earnings  Revisions”  from  CNBC  

Go  to  http://www.cnbc.com/,  “news”,  “earnings”,  “calendar”,  “consensus  revisions”.  Look  for  whether  your  stock  had  consensus  earnings  revision  today.  Copy/paste  the  information  to  the  following  table  if  any.  Go  back  one  day,  copy/paste  the  information  if  there  was  consensus  earnings  revision.  Repeat  the  process  back  one  month.  Add  rows  to  the  table  if  needed.  

 

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The  most  recent  earnings  report  date  was  12/18/13  and  the  next  earnings  report  date  will  be  3/18/14.  The  most  recent  revision  came  on  2/18/14,  which  is  a  month  away  from  the  next  earnings  report.  The  only  other  revision  came  on  1/21/14,  which  is  about  a  month  after  the  last  earnings  report.  It  seems  that  they  perform  a  revision  once  a  month  right  around  the  date  the  earnings  report  comes  out.  Looking  over  the  revisions,  we’ve  noticed  that  they  are  very  small  revisions  and  that  the  stock  has  moved  very  little  on  and  around  those  days.  One  interesting  thing  is  that  between  the  two  report  dates  FDX  has  dropped  from  a  high  of  $142  a  share  to  $128  and  is  now  beginning  to  pick  back  up.  We  think  this  shows  how  important  this  next  earnings  report  (will  include  the  holiday  season)  is  going  to  be  for  FDX.    

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Section  (F)   Analysts’  Recommendations  

(F-­‐1)  Reuters  Most  Recent  Three  Months  Analysts  Recommendations    Copy/paste  the  “Analyst  Recommendations  and  Revisions”  Table  from  http://www.reuters.com/  ,  “Analysts”  tab.  NOTE:  Make  sure  you  copy  the  entire  table  including  “Mean  Rating”  at  the  bottom  of  the  table.  

 

Analyst  have  been  recommending  a  strong  hold  to  buy  rating  on  FDX  over  the  last  3  months  with  little  change.  This  tends  to  be  the  general  sentiment  from  all  the  different  analyze  reports  on  Morningstar  and  Reuters.  Yahoo  finance  and  Reuters  have  nearly  the  same  mean  rating  of  2.2/2.1.  The  analyst  seem  to  think  FDX  is  positioned  very  well  in  the  delivery  industry,  but  are  slightly  worried  about  how  they  will  be  affected  by  slow  growth  economy,  especially  globally  as  they  have  been  working  on  expanding  their  services  around  the  global.  The  second  worry  is  gas  price  volatility.  We  think  this  is  a  good  stock  to  buy  and  hold  as  a  long  term  investment,  especially  if  the  global  economy  really  starts  to  come  back  this  year  and  next.    

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(F-­‐2)  Most  Recent  One  Month  Analysts  Upgrades/Downgrades  from  CNBC    Go  to  http://www.cnbc.com/,  “news”,  “earnings”,  “calendar”,  “upgrades”  and  “downgrades”.    There  have  been  no  upgrades  or  downgrades  from  CNBC  within  the  most  recent  month.    

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Section  (G)   Institutional  Ownership  

 The  majority  of  FDX’s  stock  is  held  by  institutions,  which  shows  that  many  experts  believe  FDX  is  a  solid  company  that  is  in  a  position  to  continue  creating  profit-­‐margin  growth  and  long-­‐term  success.  FDX  is  also  41.42%  held  in  mutual  funds,  which  tells  us  that  it  is  a  great  longer-­‐term-­‐investment  type  of  stock  that  will  see  steady  and  consistent  growth  in  the  future.  There  has  been  a  net  sell  by  the  institutions,  but  this  is  relatively  minor  and  the  stock  is  still  largely  held  by  institutions,  nonetheless.  

   

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Section  (H)   Short  Interest  

(H-­‐1)   Short  Interest  Data  from  http://www.nasdaq.com/  (NASDAQ’s  website)  

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(H-­‐2)  Short  Interest  Data  From  http://finance.yahoo.com/  

 FDX  has  seen  relatively  steady  short  interest  numbers  over  the  last  year.  At  the  beginning  of  this  year,  the  number  of  short  sales  rose  from  3  million  to  14  million,  which  sent  days  to  cover  spiking  from  2  to  6.  We  believe  this  was  caused  by  some  bad  news  coming  out  of  service  for  FDX  in  Russia  right  around  that  date,  which  also  caused  the  stock  price  to  dip  $10.00  in  just  12  days.  Since  then,  we  have  seen  the  stock  price  beginning  to  come  back  up  and  the  volume  of  short  sales  and  days  to  cover  coming  back  down.  With  a  5.2  short  ratio,  there  is  definitely  bearish  sentiment  regarding  FDX’s  short  position,  especially  compared  with  its  competitors  with  UPS  at  2.3  and  LUV  at  1.40.    

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Section  (I)   Stock  Charts  

For  (I-­‐1)  –  (I-­‐3),  the  stock  price  charts  should  include  (1)  your  stock,  (2)  1  competitor,  (3)  sector  ETF,  and  (4)  SP500    

(I-­‐1)   A  three  months  price  chart  

 (I-­‐2)   A  one  year  price  chart  

 (I-­‐3)   A  five  year  price  chart  

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 In  the  3-­‐month  chart,  FDX  was  beating  the  S&P,  XLI  and  UPS  until  January,  when  news  about  holiday  shipping  problems  came  out,  which  sent  both  UPS  and  FDX  dipping  fairly  hard  below  the  S&P,  and  XLI.  This  news,  coupled  with  problems  in  Russia  and  poor  economic  numbers  globally,  have  hurt  the  delivery  market.  Since  then,  we  have  seen  a  rise  in  both  UPS  and  FDX’s  stock  prices.  We  are  waiting  on  the  next  very  important  earnings  report,  which  comes  out  in  March.  In  the  last  year,  we  saw  FDX  start  off  rough  with  some  poor  report  numbers  in  May  and  August,  but  since  October,  they  have  seen  a  huge  jump  and  have  outperformed  all  benchmarks  with  a  very  bullish  sentiment  from  investors.  Over  the  last  five  years,  we  have  seen  FDX  consistently  outperform  the  S&P  500,  XLI  and  UPS  with  the  trend  continuing.    (I-­‐4)     Technical  Indicators  (“Moving  Average”  and  “Relative  Strength  Index”  from  http://finance.yahoo.com/)  

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In  the  50  to  10  day  moving  average,  we  see  a  death  cross  happen  right  around  January  28th,  a  few  days  after  the  stock  took  that  10  point  dip  due  to  suspended  service  in  Russia  (new  import  regulations  and  extra  paper  work).  Since  then,  the  stock  has  been  coming  back  and  -­‐  depending  on  this  next  earnings  report  -­‐  we  think  the  stock  could  see  another  golden  cross.  As  for  the  50  to  200  day  moving  average,  we  see  a  death  cross  around  9/12  and  then  a  gold  cross  around  mid-­‐December  2012  and  it  has  continued  

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above  the  200  day  moving  average  since  then  with  a  slight  dip  as  of  late.  The  RSI  is  also  at  50,  which  puts  the  stock  right  between  undersold  and  overbought  levels.  With  all  the  other  indicators,  this  leads  us  to  believe  this  is  a  good  time  to  get  in  on  FDX.