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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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