The coronavirus pandemic has been a major challenge for most sectors of the economy. But the global logistics industry has benefited from the pandemic due to the explosive growth for e-commerce. FedEx Corp. (FDX) is at the top of the logistics industry, along with fierce rival UPS.

FedEx stock has soared 72% year-to-date, massively outperforming the S&P 500 Index over the course of 2020. The impressive share price returns are the result of FedEx’s strong growth, as the company is benefiting from higher demand for e-commerce.

FedEx stock is a favored holding for many income investors and even major institutional investors such as the Bill & Melinda Gates Foundation. This article will discuss FedEx’s business overview and future expected returns.

Business Overview

FedEx Corp. is a transportation and shipping company that was founded in 1971. The company offers a variety of services including transportation, e-commerce, and business services. It operates four core segments: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services. FedEx provides domestic and international shipping for package delivery and freight. It also provides sales, marketing, information technology, communications, customer service, technical support, billing, and collection services.

On September 16th, FedEx reported its Q1financial results for the three-month period ending August 31st. For the quarter, revenues increased by 13.5% to $19.3 billion against the comparable quarter a year ago. The adjusted operating margin saw an expansion to 8.5%, which help boost EPS to $4.87, vs. $3.05 in Q1-2020. The company’s impressive results were powered by the increased demand for fast and reliable deliveries as a result of COVID-19.

During the quarter, FedEx’s services helped keep the world’s health care, industrial and at-home supply chains moving despite the overall challenges. More specifically, its results increased due to volume expansion in FedEx International Priority and U.S. domestic residential package operations, cost optimizations at FedEx Ground and FedEx Freight, and one additional operating weekday.

We expect continued growth for FedEx for many years ahead. The company is benefiting from a major tailwind, the rise of e-commerce, and the corresponding demand for shipping and logistics services. Considering the sector’s duopolistic nature, with FedEx and UPS being essentially the only market participants, the company is subject to predictable cash flows and enjoys massive economies of scale.

Valuation & Expected Returns

Our estimate for FedEx is an EPS growth rate of 6% per year over the next five years. Revenue growth will be comprised of volume growth and price increases. Separately, earnings-per-share will benefit from share repurchases. FedEx enjoys tremendous free cash flow, which allows for significant cash returns to shareholders in the form of buybacks and dividends. FedEx has a 1% dividend yield which will also add to shareholder returns.

Offsetting EPS growth and dividends is a potential reduction in the valuation multiple. FedEx stock has soared over the course of 2020, which has resulted in an elevated valuation measured by the price-to-earnings ratio. Based on the expected earnings-per-share of $15.20 for 2020, FedEx stock has a price-to-earnings ratio of 16.2. This is slightly above our fair value P/E multiple of 15. This means shareholder returns could be negatively affected by a declining P/E multiple over the next five years.

Still, we expect mid-single-digit annual returns in the range of 5%-6% per year. This is not an extremely high expected rate of return but is enough to warrant a hold recommendation. New buyers would be wise to wait for a meaningful downturn in the share price, but FedEx remains a solid hold for investors interested in a mix of growth and dividends.