Will you accept delivery?

On the BMW Method 16 year chart Fedex (FDX) sits at -2.4 RMS, with a RF of 1.45. For a company with an average CAGR of 16.3% over that time, an excellent moat and bright future, FDX is a great prospect. If BMW, RMS and RF are all meaningless then either follow the links and your nose or accept it implies FDX is cheap right now.

It is worth noting on the 20 year and 25 year charts FDX is respectively -1.72 and -0.35 RMS.

Almagne addressed this issue during the last discussion about FDX on the BMW Method board at TMF. In summary around 1990 Fedex transitioned from a business shipper to the global delivery company they now are and Almagne argued that the more recent charts should be given more weight.

BMW and others had some thoughts on FDX back in 2005

FDX was last discussed in November 2007.

10 reasons to like FDX

(here’s hoping I can get that many, fingers crossed)

• 16 year BMWm chart indicated a great price to buy
• Gross and operating margins have been improving consistently over the last decade.
• Still led by 60 year old founder who owns almost 5% of company
• Enduring growing business (China and India) with the threat of teleportation still decades if not centuries away
• Trading at 14x trailing and forward earnings. Historically very cheap. http://tinyurl.com/2qzwbw
• Improving return on assets and equity.
• Dividend low, but growing and if they stop investing in growth and convert more of earnings to free cash flow there is plenty of room for dividend growth.
• Plenty of scope to tighten their belt in a slowing environment.
• Low risk with minuscule chance of loss of capital
• From the -1RMS FDX has produced CAGR returns of above 25% every single time (yeah I just guessed that from eyeballing the chart, I’d wouldn’t mind being corrected) We’re now at under -2RMS so plenty margin of safety.
• Diversified across the globe

What’s not to like

• Possibly still investing too early, if surging oil prices derail the global economy.
• Will they ever convert earnings in to free cash flow?
• The founder is also the unholy trinity of CEO, President and Chairman and despite owing around two billion dollars in stock still likes to be paid very well in both cash and options
• Unions are starting to gain influence with FedEx (my dad would choke if he saw me putting that as a negative)

Further FDX Analysis

S&P Strong Buy 5 stars, low risk, strong and stable balance sheet. The S&P summary states the obvious; FDX’s results will be hurt by slowing US economy, but shares have overreacted and any signs of strengthening economy will push shares higher. 12 month price target of $107.

Chart http://stockcharts.com/charts/gallery.html?fdx
Two lows this year around $80 and $82, couple highs in 2007 around $120.

Possible short term options play, June $90 Puts, spread $3.2-3.4.
Selling at $3.30, gives cost if put of $86.70, return on risk of 3.8%, annualised to 47%, return on buying power of 13% and a 3.5% discount from current price.

Paying $87, a target price of $120 and ignoring the current $0.40 annual dividend I get the following:

I use this perspective to show me how long I have to obtain an acceptable return. For a BMW company like FDX with a strong moat I have very little doubt that my target will be reached so the question for me becomes when will it be reached.

I am not buying yet and have no position in FDX, but have placed a sell limit order.

Cheers
Dean

Related posts:

1. GE Five minute analysis
2. Fusion Fund Sells 5 FDX June $90 Puts