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Stock Pick of the Week: Sell/Short FedEx Corp (FDX)

Tuesday, August 24th, 2010

FedEx is one of August’s Most Dan­ger­ous Stocks. Free copy of report is here: FDX. And like all of our Most Dan­ger­ous Stocks the com­pany has:

  1. Mis­lead­ing earn­ings = account­ing prof­its are pos­i­tive and ris­ing while true, eco­nomic prof­its are neg­a­tive and falling
  2. High Val­u­a­tion = very high expec­ta­tions embed­ded in the cur­rent valuation.

Red Flags:

  1. Misleading Earnings: FDX reported a $1.1bn increase in GAAP earn­ings** while our model shows eco­nomic earn­ings declined by $107mm. The main driver of the difference between Economic and Accounting earnings is FDX’s $11.9bn of off-balance sheet debt, a big number compared to $19.7bn in Net Assets and $25.6bn of market value.
  2. The company’s ROIC is in the Bot­tom Quin­tile of all the com­pa­nies we cover.
  3. Stock price of $14.00 implies FDX must grow its NOPAT at 15% com­pounded annu­ally for 15 years. A 15-year Growth Appre­ci­a­tion Period with 15% com­pound­ing growth rate is quite a high stan­dard to beat, as per my post on How To Make Money Pick­ing Stocks.

Over­all, the Risk/Reward of invest­ing in FedEx’s stock looks Very Dan­ger­ous to me. There is lots of down­side risk given the Mis­lead­ing Earn­ings and there is lit­tle upside reward given the already-rich expec­ta­tions embed­ded in the stock price.

See Appen­dix 4 to learn how FDX NOPAT fell even though Net Income rose in its last fiscal year. See Appen­dix 5 for details on how FDX’s Invested Cap­i­tal rose as its off-balance sheet debt ballooned to $11.9bn and its Invested Cap­i­tal Turns fell to 0.96. Appen­dix 7 (in the Return on Invested Cap­i­tal sec­tion) shows how the flat NOPAT Mar­gin and falling Invested Cap­i­tal Turns result in a decrease in ROIC (to 3.8% from 4.0%) and Eco­nomic Profit, which fell by $107mm while Net Income rose by only $1.1bn.

As per and , FDX fits the pro­file of a great stock to short or sell.

**See and Eco­nomic Ver­sus Account­ing Prof­its for more detail on why account­ing prof­its are not reli­able indi­ca­tors of cor­po­rate prof­itabil­ity or value creation.

Note: Stock pick of the week is updated every Tuesday.

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3 Comments

  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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