FedEx Corporation Fair Value Estimate (NYSE: FDX)
How far is FedEx Corporation (NYSE: FDX) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock’s price is fair by projecting its future cash flows and then discounting them to present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Patterns like these may seem beyond a layman’s comprehension, but they are fairly easy to follow.
Remember, however, that there are many ways to estimate the value of a business and that a DCF is just one method. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Check out our latest analysis for FedEx
Step by step in the calculation
We use what is called a 2-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth, and the second stage is lower growth stage. First, we need to estimate the cash flow of the business over the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year free cash flow (FCF) forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF ($, Millions) | US $ 2.46 billion | 3.28 billion US dollars | 3.91 billion US dollars | 3.77 billion US dollars | US $ 3.70 billion | 3.68 billion US dollars | 3.69 billion US dollars | 3.71 billion US dollars | 3.75 billion US dollars | 3.80 billion US dollars |
Source of estimated growth rate | Analyst x6 | Analyst x7 | Analyst x5 | Analyst x1 | Is @ -1.73% | East @ -0.62% | Is @ 0.15% | East @ 0.69% | East @ 1.07% | East @ 1.34% |
Present value (in millions of dollars) discounted at 7.4% | US $ 2.3k | 2.8,000 USD | US $ 3.2k | 2.8,000 USD | US $ 2.6k | $ 2.4,000 | US $ 2.2k | US $ 2.1k | US $ 2.0k | US $ 1.9k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 24 billion
Now we need to calculate the Terminal Value, which takes into account all future cash flows after this ten year period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to their present value at a cost of equity of 7.4%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = US $ 3.8B × (1 + 2.0%) ÷ (7.4% – 2.0%) = US $ 72B
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= US $ 72 billion ÷ (1 + 7.4%)^{ten}= US $ 35 billion
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 59 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of US $ 240, the company appears to be around fair value at the time of writing. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we view FedEx as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes into account debt. In this calculation, we used 7.4%, which is based on a leveraged beta of 1.236. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Move on :
While important, calculating DCF ideally won’t be the only piece of analysis you’ll look at for a business. The DCF model is not a perfect equity valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. For FedEx, we’ve put together three important factors for you to consider:
- Risks: Take risks, for example – FedEx has 1 warning sign we think you should be aware.
- Future benefits: How does FDX’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- Other strong companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for every NYSE share. If you want to find the calculation for other actions, just search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.