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Earnings

Will strong earnings help reverse a falling FedEx share price?

FedEx has seen its share price plummet as global markets tanking from the impact of coronavirus cause fearsome delivery headwinds. Will the company’s Q3 earnings package be what investors and traders have been waiting for?

While not alone, FedEx [FDX] has seen its share price plummet in recent weeks, as coronavirus fears continue to sweep the globe and cause major indices to crash.

Since hitting a late-February high of $164.09, FedEx’s share price has slumped 35% to $106.63 on 13 March — its lowest point since 2013 as it battled competitors and trade wars, and then the spread of the virus.

The embattled share price has had a rough start to the year, but with the company due to report its Q3 results on 17 March, can investors and traders expect a post-earnings uptick?

 

 

 

 

Experiencing turbulence

The American delivery service has also faced backlash from its battle with Amazon [AMZN], which has resulted in it no longer delivering for the retail giant amid concerns that the ecommerce giant was posing a growing threat to delivery companies with its expanding fleet.

Meanwhile, it is unclear whether the spread of COVID-19 will have an overall positive or negative affect on the company. The business has substantial exposure to China, and as such may have seen a dent in shipments.

Contrary to this however, some suggest that the company could see a boost in regional revenue driven by an increased desire for deliveries from individuals opting to get items sent rather than deliver them in person.

 

What happened?

According to Zacks Equity Research, FedEx has a disappointing earnings history that has seen it miss the consensus forecasts in three of the trailing four quarters.

In its Q2 earnings announcement on 17 December, FedEx frustrated investors with weaker-than-expected earnings, which sent its share price down more than 10% following the announcement.

The company reported revenue of $17.3bn for fiscal 2020, down from $17.8bn from the previous year, while a reported operating income of $554m represented a 111% drop from the previous period. Diluted EPS also dropped from $3.51 to $2.51.

$554million

FedEx's operating income - a 111% drop from previous period

 

The company was forced to reduce its guidance due to this revenue result. CEO Frederick Smith pointed to “continued significant challenges” such as weak global economic conditions.

Smith also highlighted “some higher-than-expected expenses” for the quarter such as increased ground costs from the company’s expanded offering, but said that operating profits would improve relative to Q3.

Frederick also highlighted the “loss of business from a large customer”, no doubt in reference to the severing of ties between FedEx and Amazon.

For its upcoming results, Zacks Equity Research has a consensus EPS estimate of $1.75. It currently has a (TTM) PE ratio of 9.39 as of 13 March, which is below the air freight and cargo industry’s average PE ratios of 11.25. The research firm has a sell rating on the stock.

 

Market Cap$25.503bn
PE ratio (TTM)359.07
EPS (TTM)0.27
Quarterly Revenue Growth (YoY)-2.80%

FedEx share price vitals, Yahoo Finance, 16 March 2020

 

What are analysts saying?

“From a technical perspective, I personally would have a hard time buying FedEx right now,” research equity analyst Rick Pendergraft recently wrote in Seeking Alpha. He highlighted that EPS dropped 38% in Q2 and that expected EPS is down 44.9% from Q3 2019. “That is not a recipe for a stock that I want to own,” he said.

“Part of me wonders if FedEx could somehow see a boost in revenue from the virus concerns. Is it possible that businesses will boost their overnight deliveries since so many are cancelling business travel?” Pendergraft asked. However, he suggested that buying the share price at this point was “frightening,” suggesting that it was a “classic case of trying to catch a falling knife”.

“Part of me wonders if FedEx could somehow see a boost in revenue from the virus concerns. Is it possible that businesses will boost their overnight deliveries since so many are cancelling business travel?” - research equity analyst Rick Pendergraft

According to MarketScreener, the fact that the share is approaching its long-term support of $92.74 could offer good timing for buyers. However, it also highlights relatively low growth outlooks, which raises question marks over the company’s ability to generate enough profits.

However, others are more positive about the longer-term prospects. Much to the delight of investors and analysts, the company recently announced it would integrate its express and ground services — a move investors have long called for, according to the Wall Street Journal. Meanwhile, the company has been shifting its strategy to ecommerce, evidenced by the recent split from Amazon.

Among 27 analysts polled by CNN Business, the consensus rating was to hold the stock, with 13 analysts taking this position, while 11 rated the stock a buy. The median 12-month price target for the stock among 22 analysts was $158.50, which would represent a 48.6% increase from its 13 March close price. 

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