If 2021 has a theme, it could be that Wall Street has no patience for slowing growth. A quick glance at the stock charts of pandemic darlings like Teledoc Health, Peloton Interactive, or most solar stocks will show you just how quickly a company can go from hot to not.
Since reporting fourth-quarter fiscal year 2021 results in late June, shares of FedEx (FDX 0.72%) have been sliding. The stock is now nearly flat for the year after being up over 20% in May and handily outperforming the market in 2020. Let's take a deep dive into its business to determine if the sell-off is justified or if it presents a buying opportunity.
Image source: Getty Images.
A victim of its own success
FedEx, along with its peer United Parcel Service, benefited from a surge in business-to-consumer package deliveries during the pandemic. There's reason to believe that e-commerce will grow for years to come, leading to higher order volumes for shippers. But in the short term, it looks like FedEx's growth will slow down substantially in fiscal year 2022.
In fact, the company is guiding for just $90 billion in fiscal year 2022 revenue, a mere 7.1% increase over 2021. Single-digit revenue growth is a bad look given that FedEx increased revenue by over 20% between fiscal 2020 and 2021.
The company's results will lap quarters that occurred during the heart of the pandemic. In this sense, it is becoming a victim of its own success. Similar to growth stocks like Zoom Video Communications, FedEx's numbers continue to be impressive. But relatively speaking, growth and expectations are now much worse than they were before.
Another way to look at it
The glass-half-full approach is to look at the shipper's multiyear turnaround in its entirety, taking note of business profitability improvements in FedEx Ground and FedEx Express.
FedEx Ground, which supplied over half of fiscal 2021 revenue and operating income, has undergone fleet expansions that have increased package delivery volumes without compromising operating margins. Ground now operates seven days a week, allowing FedEx to better meet e-commerce demand. For example, FedEx was able to deliver 56% more packages on Sunday in the fourth quarter of fiscal 2021 than it did for the same period in 2020. But success isn't about delivery volumes alone.
The company is working to be able to ship larger items, improve route efficiency, and better connect the U.S. market to the European market. FedEx Europe First is an overnight service that, according to the company, connects 90% of European businesses to major U.S. markets. The numbers speak for themselves. International Priority was last fiscal year's single best-performing line item for both FedEx Express and FedEx Freight, with revenue growing 40% and 58%, respectively, between fiscal 2020 and 2021.
The competitive advantage of both FedEx Ground and FedEx Express is speed. Although convenience demands a premium, FedEx Express had a reputation for failing to deliver on profitability. That all changed in fiscal 2021 when Express finally topped its previous record-high revenue from 2017. Express segment revenue nearly tripled from fiscal 2020 while also increasing operating margin from 2.8% to 6.7%.
FDX revenue (annual) data by YCharts.
A key driver for Express in the short term could be its role in alleviating strained supply chains. The inventory-to-sales (I/S) ratio represents the value of a company's inventory relative to its revenue. On Aug. 17, Federal Reserve Economic Data reported that this ratio reached a 10-year low for the month of June 2021. FedEx called out the low I/S ratio in its fourth-quarter 2021 earnings call, noting that a low I/S ratio drives Express traffic.
Putting it all together
The contrarian viewpoint would be to regard the predicted 7% raise in fiscal 2022 revenue as a good thing. The forecast suggests that FedEx can grow its business despite difficult comps and without the tailwinds it benefited from during the pandemic. That, in and of itself, is a very good thing.
In addition to achieving overall record-high revenue and operating income in fiscal 2021, FedEx Express, Ground, and Freight each set their own record revenue and operating incomes as well. Saying that fiscal 2021 is a tough act to follow is an understatement. So instead of overweighting the comparison between fiscal 2022 and 2021, it might be better to track FedEx's business developments, fleet expansions, e-commerce service offerings, and how they all fit into the big picture. Real business decisions, not year-over-year comparisons, affect how the company can grow for decades to come.
Long-term investors could view the sell-off in FedEx stock as a buying opportunity. The business is in great shape, and the stock has a price-to-earnings ratio of just 13.6, placing it in the bargain bin. Given its solid fundamentals, it could be an excellent value stock for investors looking to pick up an e-commerce play on the cheap.
