'Tis the season to ship packages -- lots of 'em. So now seems like the perfect time to check up on worldwide delivery titan and Motley Fool Stock Advisor pick FedEx
FedEx trades at a discount to the broader market in many valuation metrics as well, but does that make the stock a bargain? Let's crunch the numbers and see what we turn up.
Buy the numbers
Because I'm a dyed-in-the-wool investing cheapskate, one of my favorite number-crunching devices is the discounted cash flow (DCF) calculator that my Fool colleague Philip Durell makes available to his Motley FoolInsideValue subscribers. (Click here to try the service for free.) It's a valuable tool for quickly estimating whether a company is worthy of further research.
Using the tool is simple, but you'll need to gather some data to make it fly. For starters, you need a "discount rate" -- i.e., the rate of return an investor requires to feel adequately compensated for the business risk of investing in a given company. For large caps like FedEx, Philip recommends inputting a discount rate in the range of 9% to 12%; I'll go with the low end of that range for starters. Next, we'll move on to the input field for free cash flow (cash from operations less capital expenditures). FedEx's free cash flow was $881 million for the fiscal year that ended in May 2005.
Go forward, move ahead
Now we need to make some assumptions about FedEx's earnings growth rates over the near, medium, and long term. Everyone got a crystal ball ready?
Just joking. Philip has guidance for us there, too. He advises caution in estimating long-term earnings; in his own work, he typically assumes a 3% rate of return after year 10 because that figure approximates the rate of inflation.
I'll follow Philip's lead there and rely on analyst estimates for the calculator's next-five-years field. According to data available from First Call/Thomson Financial, the median growth estimate for FedEx over the next five years is 15%. I'll plug that into the calculator, and for years six to 10, we'll plug in 9%, just as Philip instructs.
(Specifically, he tells us in the calculator's handy-dandy instructions to pick a figure for the middle period between our estimate for the first five years --15% -- and the terminal rate -- 3%. Ergo, 9%.)
The last two fields are simple stuff. We'll grab the number of shares outstanding from here and FedEx's current stock price here. Then, we'll click the big fat "Calculate" button at the bottom of the input fields.
Survey says .
OK, the results are in! Given our inputs, around midday on Nov. 28, FedEx was trading at a bit of a discount to its intrinsic value, which the calculator estimates to be $101 per share. So does that mean that you should stop reading, head to your favorite discount broker, and buy the stock right now?
In a word, no. In two words, absolutely not.
Remember: Inside Value's DCF calculator is designed to give you a rough estimate of a company's valuation, a figure you can use to decide whether a firm is worthy of further research. You might pause, for instance, and ponder the recent rapid rise in FedEx's stock price. On Sept. 20, it stood at just $77, but currently, shares of FedEx are hovering near the $98 mark. With that history in mind, the current discount seems modest indeed.
Moreover, your research might lead you to conclude that, given FedEx's second-fiddle status to UPS, you'd require a greater return for the risk assumed when buying the company's stock. We went with 9% in our calculations, but if you opt for 12% -- the high end of Phil's recommended range -- the intrinsic value output shrinks to just $64 per share. Moreover, while I used free cash flow numbers from fiscal 2005, it's certainly worth noting that the comparable figure for the trailing-12-month period that ended with August is much lower, weighing in at roughly $651 million.
Make like Columbo
That affects the intrinsic value of the company as well, of course. Just a bit more digging reveals that cash from operations actually rose between the ends of fiscal 2004 and fiscal 2005 -- but capital expenditures climbed faster. That's been a recent trend at the company, with capex nearly doubling between the close of fiscal 2004 and fiscal 2005.
Do I hear the sound of a chin being scratched? Good. That's precisely what Inside Value's very cool DCF tool is designed to induce. As you take off your number-crunching hat and slip into investing-detective mode, accounting for the surge in capital expenditures at FedEx seems like a mighty fine place to start.
Happy sleuthing!
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FedEx is a Motley Fool Stock Advisor recommendation.
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Shannon Zimmerman is the lead analyst for the Fool's Champion Funds newsletter and doesn't own any of the securities mentioned. The Fool has a strict disclosure policy.
