FedEx Corp and the Billion Dollar Report

FedEx Corporation stock is down over 4% today after a downgrade by a tier one firm.  Today’s decline is on top of the transport losses of the last few days, partly based upon the UPS news.  The analyst covering the stock is experienced, has won multiple awards and holds a law degree.

Most market participants will never know the reasoning behind this move.  Those summarizing it on TV cite it as further evidence of a weak economy.

What does the report say?

First, it says there is no risk to near-term earnings.  Next, it says that the stock is trading at a significant discount to historical one, three, and five-year average valuations.

In short, the market is already anticipating bad news.  And these values were before the analyst report took the stock down another 4%.

So what is the basis for the downgrade?

The analyst thinks that economic conditions will deteriorate so he is making a "macro call."  This is exactly the point I have been making about current street research.  Analysts do not stick to what they do well — covering the company and it’s business.  They instead become economic forecasters, calling the top of the economic cycle.  They are not experts at this and have a poor record trying to do it, but the post-2000 era encourages them to find downgrades.

The second basis for the downgrade is that FDX supposedly experiences multiple compression in the time after a Fed tightening cycle ends.  The analyst provides a table showing that PE multiples are about 10-20% lower a few months after the cycle.  (Coincidentally (??), this is about the size of the current discount.

The research report provides a table to verify this.  It shows two things:

  1. The research finding about multiples after a Fed tightening was based upon two casesThat’s right — count ’em:  One, two.  I could hardly believe it.  I guess the law school did not discuss anything about statistical inference.
  2. Even in these two cases the stock went up at an annualized rate of about 10% for the two periods combined.

So there you have it — the basis for a billion-dollar haircut in the Fed Ex market cap.  This is the reverse of the 2000 bubble era where analysts found reasons to take stocks to unprecedented valuation levels.

[I own calls in my fund.  I’ll buy some more.]

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