Freightways Group (NZSE:FRW): A 35% Undervaluation and 10.8% EPS Growth Make This Logistics Play a Long-Term Compelling Buy

In the world of value investing, few opportunities are as compelling as Freightways Group (NZSE:FRW), a New Zealand-based logistics and freight services giant that has quietly carved out a niche in a sector ripe for growth. As of August 3, 2025, the stock trades at NZ$11.24, a full 35% below its estimated intrinsic value of NZ$15.15, according to a robust two-stage discounted cash flow (DCF) model. This discount, combined with a projected 10.8% annual earnings per share (EPS) growth over the next three years and a stark divergence between its valuation metrics and fundamentals, positions Freightways Group as a standout long-term opportunity for investors willing to look beyond short-term noise.

A 35% Intrinsic Value Discount: The DCF Model's Verdict

The case for undervaluation begins with the DCF analysis, which projects Freightways' intrinsic value at NZ$15.15 per share. This calculation hinges on two key pillars: the present value of its 10-year free cash flow (NZ$859 million) and a terminal value of NZ$1.9 billion, derived using the Gordon Growth model. Together, these components yield a total equity value of NZ$2.7 billion, translating to a fair value of NZ$15.15. At the current share price of NZ$11.24, the stock is trading at a 24.7% discount to this intrinsic value, a margin that offers a margin of safety for patient investors.

What's more, the company's fundamentals reinforce this valuation. Over the past five years, Freightways has delivered a 60.57% total return, outperforming the broader market. First-half 2025 earnings of NZ$0.25 per share (up from NZ$0.23 in the same period in 2024) underscore its ability to generate consistent profits. Analysts have even raised the price target to NZ$11.25, a 11% increase from previous estimates, signaling confidence in its near-term trajectory.

EPS Growth of 10.8%: A Path to 2027 Earnings of NZ$0.63

Freightways' earnings potential is where the story gets even more exciting. Analysts project a 10.8% annual EPS growth rate from 2025 to 2027, a figure that outpaces both its 10.4% revenue growth forecast and the 3.4% savings rate. By 2027, the company's EPS is expected to reach NZ$0.63 per share, a three-year compound annual growth rate (CAGR) that would represent a 148% increase from its first-half 2025 result.

This growth is underpinned by strategic investments in air fleet modernization and automated facilities, which are expected to cut costs and boost operational efficiency. Additionally, the company's return on equity (ROE) is forecast to hit 21.2% in three years, a metric that speaks volumes about its ability to generate returns for shareholders. With a payout ratio of 91%, Freightways has also demonstrated a commitment to rewarding investors through dividends, though the high payout ratio does raise questions about sustainability if earnings falter.

A Mispriced Stock: Valuation Metrics vs. Industry Peers

The most striking aspect of Freightways' valuation is the divergence between its price-to-earnings (P/E) ratio and those of its peers. The stock currently trades at a P/E of 26.8x, significantly higher than the Global Logistics industry average of 15.1x and the peer average of 25.9x. For context, companies like Mainfreight (21.8x), Air New Zealand (15.6x), and Napier Port Holdings (20.8x) all trade at lower multiples. This suggests that Freightways is overvalued in terms of relative earnings but undervalued in terms of intrinsic cash flow.

The company's enterprise value/EBITDA (EV/EBITDA) ratio of 14.5x also stands out as a premium to the industry median of 8.89x. Yet, when compared to its DCF-derived fair value, Freightways is trading at a 24.7% discount, a discrepancy that hints at a potential re-rating if the market begins to reflect the company's true cash flow potential.

Risks and Considerations: A Balanced View

No investment is without risk. Freightways' high debt-to-equity ratio of 131.49% is a red flag, indicating a heavy reliance on debt financing. While this leverage can amplify returns in good times, it also exposes the company to financial stress in a rising interest rate environment. Additionally, its dividend yield of 3.39% is not well covered by earnings, raising concerns about the sustainability of payouts if growth slows.

The DCF model itself is not immune to assumptions. It hinges on projected growth rates and discount rates, both of which could shift with macroeconomic conditions or operational missteps. Investors must also consider the possibility of a market-wide correction in logistics stocks, driven by factors like supply chain normalization or regulatory changes.

Strategic Entry and Long-Term Outlook

For long-term investors, Freightways Group represents a compelling case of mispricing. The 35% discount to intrinsic value, coupled with a 10.8% EPS growth outlook and a robust business model, creates a margin of safety that is rare in today's market. The company's strategic initiatives—ranging from fleet upgrades to automation—are poised to drive efficiency gains, which should translate into higher margins and cash flow.

However, patience is key. The stock's current valuation suggests the market is not yet pricing in its full potential. For investors with a 3-5 year horizon, Freightways offers an opportunity to capitalize on this gap. A gradual entry into the stock, particularly if the share price dips further below its intrinsic value, would align with a disciplined value investing approach.

In conclusion, Freightways Group is not a get-rich-quick play but a well-positioned logistics company trading at a significant discount to its intrinsic worth. With a clear path to earnings growth and a valuation that doesn't reflect its fundamentals, it's a stock that deserves a place in the portfolios of those willing to bet on the future of New Zealand's integrated freight and logistics sector.