Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put FedEx Corporation (FDX - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, FedEx has a trailing twelve months PE ratio of 16.55. This level compares pretty favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 20.09.
If we focus on the long-term trend of the stock the current level puts FedEx’s current PE near its median (which stands at 17x) over the observed period. Notably, the current level is much below the highs experienced for the stock over the period, suggesting some level of undervalued trading in light of its own historical trend.
Further, the stock’s PE also compares favorably with the air freight industry’s trailing twelve months PE ratio, which stands at 17.18. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that FedEx has a forward PE ratio (price relative to this year’s earnings) of just 15.13 – which is lower than the current level. So, it is fair to say that a slightly more value-oriented path may be ahead for FedEx stock in the near term too.
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, FedEx has a P/S ratio of about 0.91. This is much lower than the air freight industry average, which comes in at 1.4x right now.
As we can see, the stock is trading at its median value for the time period from a P/S metric. This does not provide us with a conclusive direction as to the relative valuation of the stock in comparison to its historical trend.
Broad Value Outlook
In aggregate, FedEx currently has a Value Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes FedEx a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the EV/EBITDA multiple for FedEx is just 8.19, a level that is lower than the industry average of 9.75. The EV/EBITDA multiple (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) is capital structure-neutral, as it takes into account the level of debt on a company’s balance sheet, not just its equity.
Clearly, FDX is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though FedEx might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘A’ and a Momentum score of ‘D’. This gives FDX a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s earnings estimates have been mixed at best. The current quarter has seen one estimate go higher in the past sixty days compared to two lower, while the full year estimate has seen four upward revisions and five downward revisions in the same time period.
This has had a small impact on the consensus estimate though as the current quarter consensus estimate has increased 1.6% over the past two months, while the full year estimate has inched up 0.4%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
FedEx Corporation Price and Consensus
This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) despite strong value metrics and why we are looking for in-line performance from the company in the near term.
FedEx is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Moreover, a strong industry rank (Top 46% out of more than 250 industries) further supports the growth potential of the stock.
We are also impressed by the company’s efforts to reward shareholders through share buybacks and dividends. In June this year, the company raised its quarterly dividend by 25% to $0.50 a share (or $2 annually) from $0.40 (or $1.60 annually). We believe that the dividend hike not only highlights FedEx’s commitment to create value for shareholders but also underscores the company’s strong financial condition and confidence in its business prospects. Moreover, a look at past records reveals FedEx’s stable dividend payment history.
So, it might pay for value investors to delve deeper into the company’s prospects, as fundamentals indicate that this stock could be a compelling pick.
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