Mercado turns its back on FedEx; weigh low profits and worrying projection

  • FDX shares tumbled last week after offering downward guidance for its fiscal first quarter

  • Earnings cut alone casts doubt on value, but that’s not the biggest risk

  • The turn in sentiment in a matter of weeks should raise real concern

For starters, I was wrong about FedEx Corporation (NYSE:). In early July, I thought FDX stock was an intriguing game.

In my defense, I also pointed out that it was a risky move. And in that respect, he was right. FDX shares plunged last week. Friday’s 21% drop was the biggest move lower for stocks. Deutsche Bank called the report “the weakest set of results we’ve seen relative to expectations in our ~20 years of analyzing companies.”

Crucially, the decline doesn’t necessarily seem like an overreaction. FedEx’s estimate for first-quarter earnings of $3.44 was a third lower than the analyst consensus of $5.14. FedEx also withdrew its forecasts for the full fiscal year.

In this context, a decrease of 21% seems reasonable. Earnings this year could be 20% or more below expectations, implying a new lower growth base.


But it’s not just the fundamentals that are a problem here. FedEx has long had management and execution problems. As of early July, FDX shares had gained 3% overall over five years. Shares of United Parcel Service (NYSE:) rose 67% in the same period.

FedEx’s acquisition of TNT Express (OTC:) in Europe ran into trouble, and the decision not to partner with (NASDAQ:) in North America caused it to lose market share.

Investors bullish on FDX stock this summer – again, myself included – believed the company’s execution would improve. The arrival of activist investor DE Shaw bolstered those hopes.

But the ugly figures for the first quarter suggest that this is FedEx business as usual. If that’s the case, FDX stocks aren’t cheap enough.

June versus September

There is great cause for concern in the figures for the first quarter. At the end of June, FedEx held its investor meeting. The previous week, FedEx had given strong guidance for fiscal year 2023 (the same guidance that was withdrawn last week). And at the meeting, FedEx management was wildly upbeat.

FedEx was forecasting annual adjusted earnings per share growth of 14-19% through fiscal 2025. And while analysts were somewhat skeptical of these targets, there was a real sense that if FedEx could come close to its targets, stocks would have a huge run to the upside. In fact, at the time, Wall Street’s median price target was approaching $300.

What happened in the first trimester?

What’s unbelievable and troubling about the first quarter flop is that when FedEx management had a rosy three-year outlook, the company was already four weeks into its disastrous quarter.

First quarter results as a whole fell well short of both company and analyst expectations. But the huge loss – again, one that one analyst called the market’s worst in two decades – was apparently driven entirely by the performance of the last nine weeks of the quarter.

The only other explanation is that FedEx management at the time of the investor meeting did not really understand what was going on with their business. That’s probably not entirely true — a company like FedEx knows what its revenue is every day — but the executives certainly weren’t aware of the situation.

Crucially, then, we know that FedEx’s business absolutely tanked in the last two months of the quarter. And we know that a company with longstanding management problems did not see that collapse coming at all.

On June 29, executives were giving a multi-year outlook that may well have led the stock to double. The shares are down 32% since then. It is now down 25% in the last five years; UPS is up 54%.

Are FDX Stocks Cheap?

In this context, it’s hard to get excited about FDX. If first quarter EPS were to hold for the rest of the year, full year adjusted EPS would be below $14, suggesting an earnings multiple of about 12 times, which is not out of line. relative to the stock’s multi-year range.

FedEx has cost cuts on the way that could presumably help profits in 2023. Still, the stock looks possibly fundamentally cheap, but it’s not a bargain.

In fact, the fundamental profile here is essentially the same as it has been for years. FedEx has been committed to improving execution, expanding profit margins and stabilizing revenue growth.

That’s what FedEx promised at the end of June. But as has happened so many times in recent years, the promise has been broken.

Disclaimer: At the time of this writing, Vince Martin has no positions in any of the listed stocks.

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