When I look at a company I always like to go back to basics. For me that means a quick review of the key tenets found in Benjamin Graham's investment classic The Intelligent Investor. This helps me to look past the story of a stock, which is important when you're looking at shipping giant FedEx Corporation (NYSE:FDX). The massive growth in online shopping has vastly increased the demand for this company's shipping services. That's a great story and I like FedEx -- but let's see what Graham might think before we jump in and say buy.
What kind of investor?
The first key distinction that Graham makes is between defensive and enterprising investors. Most investors should err on the side of caution and stick with defensive stocks. For Graham that meant large, well run companies with long histories of paying dividends.
FedEx, in my opinion, fits that bill. For example, its market cap is $72 billion, easily making it a large company. Although earnings bounce around a little, they've trended generally higher over the last decade. The bottom-line tally in 2016 was roughly three times as high as it was in 2007. Dividends, meanwhile, increased in nine years over that 10-year span. Dividends were over five times larger in 2016 than they were at the start of the period.
Long-term debt is roughly 50% of the capital structure, which is a little high for my taste. However, FedEx operates in a capital intensive industry (buying airplanes and trucks is expensive). So that's not an unreasonable amount of leverage. For comparison, long-term debt makes up around 90% of United Parcel Service, Inc.'s (NYSE:UPS) capital structure, a much more concerning level of leverage. UPS is one of FedEx's main competitors.
How about the value?
All in all, FedEx looks like it easily passes the defensive investor screen (noting my modest concern about leverage). But that's just step one. Even a great company isn't always a good investment. Which is the second big tenet of Graham's investment advice: price is what you pay, value is what you get. If you pay too high a price for a great company it can turn into a terrible investment. So let's take a quick look at some key valuation metrics.
FedEx's Price to Earnings ratio is 25. That's a little high when you consider that the market's PE is around 23. However, FedEx's PE is actually lower than its five year average, which is around 27. For comparison, UPS' PE is a huge 32.6, with a five year average of 39.4. Which is why you should consider more than a single isolated metric when you examine a company. You could argue that FedEx looks undervalued relative to its recent history and its main peer.
But let's not stop here.
Price to Book Value is the next ratio we'll examine, which starts to change the picture a little bit. FedEx's PB ratio is 4.3, versus a five year average of 2.9. The current PB is also higher than the broader market's 3.2. UPS's PB ratio is roughly 76, compared to a five year average of around 48.5. So FedEx might be a better value than UPS when looking at price to book, but this metric suggests overvaluation for both companies when you make the comparisons to their own histories and the market.
The third ratio to examine is Price to Sales. FedEx's PS ratio is 1.2, compared to a five year average of 0.9. This suggests that it is trading at a premium to its history. However, the broader market's PS ratio is 2.2, which hints at a bargain price. UPS, meanwhile, sports a PS ratio of 1.8, versus a five year average of 1.6. Although the market has a higher PS ratio, FedEx again looks expensive relative to its recent past, as does UPS.
Price to Cash Flow is the last ratio we'll examine. FedEx's P/FCF ratio 19.4, compared to a five year average of 9.6. The market's P/FCF ratio is 14.3. These numbers make FedEx look extremely expensive today, until you look at UPS. UPS' P/FCF ratio is currently around 21, compared to a five year average of 15.5. Still, it's difficult to suggest that FedEx is cheap based on the price to cash flow ratio.
The big takeaway
FedEx is a great company with an amazing history behind it. It's the type of company that just about any investor, defensive and enterprising alike, could feel comfortable owning. And there are many investors who, quite reasonably, approve of its long-term prospects.
However, that doesn't mean it's trading at a desirable valuation. Although FedEx's PE suggests it might be reasonably priced today, when you consider that ratio along with the PB, PS, and P/FCF ratios, the picture shifts. Overall, FedEx looks like it's relatively expensive today versus its past and the broader market. It may be a better value than peer UPS, but that still doesn't make it worth buying right now. Value-conscious investors probably shouldn't be buying FedEx today.