What happened
Shares of FedEx (FDX 0.78%) rose 12.3% in December, according to data from S&P Global Market Intelligence.
It's not hard to understand why FedEx rose during the month; it reported earnings that handily beat revenue and earnings expectations, and also received a nice analyst upgrade. In addition, FedEx is a value stock that trades at a low multiple of its earnings. Those types of stocks have done much better recently as investors prepare for rising interest rates.
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So what
In its fiscal second quarter, FedEx grew revenue 14%, and adjusted (non-GAAP) earnings per share came in at $4.83. Both figures came in ahead of expectations. Not only that, but management indicated on the conference call with analysts that FedEx is still repricing contracts higher, reflecting shipping constraints and booming e-commerce demand. So revenue and profitability should continue to rise even further as FedEx raises prices in a favorable environment.
Management was similarly bullish beyond just next quarter. It now expects the U.S. parcel market to grow 70% between 2020 and 2026, with most of that coming from continued e-commerce growth. And management also expects international shipping to be constrained not just next year but through 2024.
To cap off an impressive month, analysts at J.P. Morgan raised their price target on FedEx to $315 compared to a $264 stock price today. Analyst Brian Ossenbeck wrote:
Stronger pricing, higher fuel surcharge recoveries, and favorable mix should also provide tailwinds in the back half of fiscal 2022. FedEx also stands to benefit from the long-awaited integration of the TNT acquisition starting in calendar-year 2022.
Getting the TNT Express integration behind the company should be a big deal. After acquiring the company for $4.8 billion in 2016, the integration has been a bit of a mess. Integration costs were higher than expected, running into the billions, and TNT was hit with a cyber attack in 2017 that cost FedEx another $400 million.
But management now expects that integration to be fully complete by April after which the integrated company should be better positioned to capture that international shipping opportunity.
Now what
FedEx had previously disappointed investors amid surging costs this year, and despite December's rise, the stock still sits 17.7% below its all-time highs. However, it appears management is getting past its labor and fuel-cost pressures with strong hiring and rising contract prices.
Moreover, the company trades at just 12.7 times this year's earnings estimates, with FedEx's fiscal year ending in June. With a favorable pricing environment and still-low valuation after December, it looks like FedEx has a favorable setup for 2022, especially if value stocks continue to outperform growth.
