The global package delivery company's fourth-quarter adjusted EPS and sales topped the Street's view as more consumers shopped online. But, the mid-point of its fiscal 2017 adjusted earnings forecast of $11.75 and $12.25 per share fell short of the consensus' $12.17 per share.
Recent Results
"Overall results were a little worse than we expected and are incrementally bearish to our less than constructive view on the stock. The lack of visibility on TNT combined with concerns about sustainability of Express profits against rising oil combined with an outlook for margin compression at Ground are setting FDX up for another transitional year at best," analyst David Vernon wrote in a note.
TNT Integration
Vernon updated his model and now projects fiscal 2017 earnings of $11.66 inclusive of TNT, and ex TNT, he expects EPS of $11.90.
Meanwhile, Vernon is a "little concerned" on the company's willingness to continue its investment into ground expansion at a time when margins are compressing.
Commenting on the TNT integration, the analyst said it is going to be difficult to truly keep separate TNT and Express results, particularly if the company starts selling Fedex Express international services into the TNT account base.
"We would think it wise that FDX begins de-marketing TNT trans-Atlantic and Asia-Europe package services prior to any physical integration, and would be surprised if the company doesn't move in this direction before the end of the year," Vernon highlighted.
Figures, Estimates And Expectations
The analyst cut his price target to $154 from $157, saying that he sees very little chance that the "company will re-rate higher on cash based valuation metrics at a time when earnings growth is slowing, capital intensity is increasing, and visibility to the margin outlook remains weak."
The stock is currently trading at an enterprise value/NTM EBITDA multiple 6.5x consensus estimates. Vernon maintains his Market Perform rating on the stock.
"We don't recommend the stock long, as material upside requires a re-rating on valuation multiples that seems difficult to justify due to slowing growth and the noise associated with earnings adjustments, and there is significant downside risk in the event the macro cools or oil prices recover," Vernon added.
At the time of writing, shares of FedEx were down 4.18 percent to $157.09 on the day.
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