FedEx: Stock of the Week

Andrew Willis: Did you know that FedEx FDX routes can cost hundreds of thousands of dollars? Much of those FedEx Ground delivery trucks are businesses owned by drivers. And the value of those businesses shows strong demand despite what you might be seeing in the headlines after recent results.

While the nearly 70% quarterly decline in income from FedEx Express caught a lot of attention as the parcel company is seen as a bellwether--or leading indicator--for the economy, that stat only represents those parcels on a stricter schedule. What if consumers just want to wait a little longer, in exchange for savings on shipping?

Growth in FedEx Home Delivery contributed to a small increase in operating income for FedEx Ground last quarter, a trend of outperformance that senior equity analyst Matthew Young expects to continue as the company seeks to serve a growing market of shippers pursuing retail e-commerce.

We expect U.S. e-commerce retail sales to continue growing in the medium term, despite headwinds of what we view as normalization of demand after a pandemic-driven shift and surge in residential deliveries. Outside a major recession, we do see volumes falling in the short term by about 3% to 4% for FedEx Ground and 7% for FedEx Express by May of next year. And while the comments about a potential recession from FedEx's CEO might be cause for concern, e-commerce spending should remain a long-term tailwind for the company, helping profitability stabilize in the year ahead.

One pain point for margins at FedEx has been from major investments to prepare its shipping network for business-to-consumer opportunities, but now we see them shifting from a growth to an efficiency posture. And if the economy can stay afloat, it might just be an indicator the stock's a buy.

For Morningstar, I'm Andrew Willis. Check out Morningstar.ca to watch "Adobe: Stock of the Week."