- Misleading earnings = accounting profits are positive and rising while true, economic profits are negative and falling
- High Valuation = very high expectations embedded in the current valuation.
- 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.
- The company’s ROIC is in the Bottom Quintile of all the companies we cover.
- 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.