This week, we use AAII’s A+ Investor Stock Grades to provide insight into three logistics stocks. With rising concerns after FedEx’s recent earnings miss, should you consider these three logistics stocks of Expeditors International of Washington Inc., FedEx Corp. and United Parcel Service Inc.?
Logistics Stocks Recent News
The global logistics market is expected to grow at a 6.8% compound annual growth rate (CAGR) between 2022 and 2030, particularly due to a surge in e-commerce logistics, container shortages, closure of major ports causing port congestion, shortage of truck drivers and restricted capacity in the air freight market.
With the rising prevalence of e-commerce, logistics providers will be forced to adopt automation and newer technologies such as artificial intelligence (AI), geofencing, Internet of Things (IoT) and data analytics to make the delivery and returns experience seamless and cost effective for both customers and retailers.
The Russia-Ukraine conflict disrupted the logistics industry earlier this year. Freight has been rerouted, derailed and suspended from surrounding areas disrupting the global supply chain network.
FedEx’s rather large earnings miss in September raises concerns over the outlook for logistics. FedEx cited a decline in volume as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S. Macroeconomic weakness was particularly prevalent in Asia and Europe. Additionally, the company withdrew its full-year earnings guidance. Many fear that other companies such as UPS could suffer the same fate.
Grading Logistics Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been indicated by research and real-world investment results to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three logistics stocks — Expeditors International, FedEx and United Parcel Service — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Logistics Stocks
What the A+ Stock Grades Reveal
Expeditors International of Washington Inc. (EXPD) provides a range of global logistics services. The company’s services include air and ocean freight consolidation and forwarding, customs brokerage, warehousing and distribution, purchase order management, vendor consolidation, time-definite transportation services, temperature-controlled transit, cargo insurance, specialized cargo monitoring and tracking and other supply chain solutions. The company’s principal services categories include airfreight services, ocean freight and ocean services and customs brokerage and other services. It offers a range of custom solutions, including customs brokerage and import services, as well as warehousing and distribution services. Within airfreight service, it typically acts either as a freight consolidator or as an agent for the airline that carries the shipment. The company serves a range of industries, including health care, aerospace and aviation, manufacturing, oil and energy, automotive and fashion.
The company has a Value Grade of B, based on its Value Score of 71, which is considered to be a good value. Higher scores indicate a more attractive stock for value investors and, thus, a better grade.
Expeditors International’s Value Score ranking is based on several traditional valuation metrics. The company has a rank of 19 for shareholder yield, 27 for the price-to-sales (P/S) ratio and 32 for the price-earnings (P/E) ratio (with the higher the rank being better for value). The company has a shareholder yield of 4.0%, a price-to-sales ratio of 0.75 and a price-earnings ratio of 9.6. The ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) is 6.6, which translates to a score of 30.
The Value Grade is based on the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above, along with the price-to-free-cash-flow ratio (P/FCF) and the price-to-book-value (P/B) ratio. The rank is scaled to assign higher scores to stocks with the most attractive valuations and lower scores to stocks with the least attractive valuations.
Expeditors International has a Momentum Grade of C, based on its Momentum Score of 48. This means that it is average in terms of its weighted relative strength over the last four quarters. This score is derived from an above-average relative price strength of negative 10.4% in the second-most recent quarter and 1.0% in the fourth most recent quarter, offset by a below-average relative price strength of negative 7.2% in the most-recent quarter and negative 18.2% in the third-most-recent quarter. The scores are 44, 71, 28 and 77 sequentially from the most recent quarter. The weighted four-quarter relative price strength is negative 4.3%, which translates to a score of 48. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
Expeditors International has a Quality Grade of A with a score of 92. The company ranks strongly in terms of its return on assets (ROA), buyback yield and gross income to assets. The company has a return on assets of 20.5%, a buyback yield of 2.4% and a gross income to assets ratio of 65.4%. The industry average buyback yield is significantly worse than Expeditors International’s at negative 0.5%. The company ranks below the industry median for change in total liabilities to assets and accruals to assets.
FedEx Corp. (FDX) provides a portfolio of transportation, e-commerce and business under the FedEx brand. The company’s segments include FedEx Express, FedEx Ground, FedEx Freight and FedEx Services. The FedEx Express segment offers a range of U.S. domestic and international shipping services for delivery of packages and freight. The FedEx Ground segment provides small-package ground delivery services, which includes day-certain service to any business address in the U.S. and Canada, as well as residential delivery services through its FedEx Home Delivery service. The FedEx Freight segment offers less-than-truckload freight services. The FedEx Services segment provides sales, marketing, information technology, communications, customer service, technical support, billing and collection services and certain back-office functions that support the company’s operating segments.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
FedEx has a Quality Grade of A with a score of 89. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets, return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The F-Score is a number between zero and nine that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its gross income to assets, F-Score and buyback yield. FedEx has a gross income to assets of 75.3%, an F-Score of 7 and a buyback yield of 2.6%. The sector median gross income to assets and F-Score are 22.5% and 5, respectively. The company also ranks highly with a return on assets of 4.2% which ranks in the 70th percentile. However, FedEx ranks poorly in terms of its return on invested capital, in the 18th percentile.
Earnings estimate revisions offer an indication of how analysts view the short-term prospects of a firm. For example, FedEx has an Earnings Estimate Revisions Grade of F, which is very negative. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
FedEx reported a negative earnings surprise for first-quarter 2023 of 33.1%, and in the prior quarter reported a positive earnings surprise of 0.1%. Over the last month, the consensus earnings estimate for the second quarter of 2023 has decreased from $5.501 to $2.817 per share due to 20 downward revisions. Over the last three months, the consensus earnings estimate for full-year 2023 has decreased 35.3% from $22.466 to $14.528 per share due to 24 downward revisions.
The company has a Value Grade of B, based on its Value Score of 77, which is in the value range. This is derived from a very low price-to-sales ratio of 0.39 and a high shareholder yield of 5.9%, which rank in the 15th and 13th percentile, respectively. FedEx has a Growth Grade of A based on a score of 90. The company has strong five-year annual sales growth of 9.2%.
United Parcel Service Inc. (UPS) is a package delivery company and provider of global supply chain management solutions. Its segments include U.S. domestic package and international package. U.S. domestic package and international package are together referred to as its global small package operations. These provide delivery services for express letters, documents, packages and palletized freight via air and ground services. The U.S. domestic package segment offers small package delivery services in the U.S. and offers a spectrum of U.S. domestic guaranteed air and ground package transportation services. The international package segment consists of its small package operations in Europe, Asia Pacific, Canada, Latin America and Indian subcontinent, Middle East and Africa (ISMEA). Its remaining businesses include supply chain solutions, which consists of its forwarding, truckload brokerage, logistics and distribution and other businesses.
UPS has a Quality Grade of A with a score of 98. The company ranks strongly in terms of its return on assets, gross income to assets and F-Score. UPS has a return on assets of 15.9%, a gross income to assets of 108.0% and an F-Score of 7. The company ranks above the industry median for all other quality metrics.
UPS has a Momentum Grade of B, based on its Momentum Score of 61. This means that it is above average in terms of its weighted relative strength over the last four quarters. This score is derived from a relative price strength of negative 6.0% in the most recent quarter, negative 2.9% in the second-most-recent quarter, 8.2% in the third-most-recent quarter and 5.8% in the fourth-most-recent quarter. The scores are 46, 48, 73 and 87 sequentially from the most recent quarter. The weighted four-quarter relative price strength is negative 0.2%, which translates to a score of 61.
UPS reported a positive earnings surprise for second-quarter 2022 of 4.2%, and in the prior quarter reported a positive earnings surprise of 5.8%. Over the last month, the consensus earnings estimate for the third quarter of 2022 has decreased from $2.883 to $2.876 per share due to two downward revisions. Over the last month, the consensus earnings estimate for full-year 2022 has decreased 0.1% from $12.874 to $12.858 per share, based on two downward revisions.
The company has a Value Grade of C, based on its Value Score of 48, which is average. This is derived from a below-average price-earnings ratio of 13.2 and a high shareholder yield of 3.9%, which rank in the 45th and 20th percentile, respectively. UPS has a Growth Grade of A based on a score of 98. The company has a strong five-year annual sales growth rate of 9.6%.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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