FedEx Corporation FDX reported concerning fiscal first-quarter results, which prompted management to revise its 2020 outlook lower.
FedEx earned $3.05 per share in the quarter on revenue of $17.048 billion versus expectations of $3.17 per share and $17.07 billion due to what management said was a "weakening global macro environment." The company lowered its full year EPS guidance to $10 to $12 due to increased Ground costs and the loss of revenue from a large customer.
Resetting The Reset Button
FedEx has been "sharply" slashing its outlook since the end of 2018 and Tuesday's print could prove to be the final reduction, Morgan Stanley analyst Ravi Shanker wrote in a note. Management's earnings cut of 25% at the low end of the range is "big enough" to call a potential bottom to earnings. However, this isn't a compelling enough reason to turn bullish on the stock as the company has to show a path towards sustained growth in fiscal 2021 and beyond.
FedEx provided a wider than usual EPS range which looks to be de-risked barring an outright recession, Credit Suisse analyst Allison Landry wrote in a note. The revision now makes the case for a potential re-acceleration in earnings growth next year.
The company continues to set up relationships with large and traditional retailers looking to better compete against Amazon.com, Inc. AMZN. These relationships could pay off over time after FedEx finalizes investments in delivery, tech/automation, and fully integrates SmartPost.
Investing Through The Pain
FedEx's report showed weakness in the international Express business but the rest of the company (Ground, Freight and Domestic Express) is performing inline with expectations, Raymond James analyst Patrick Tyler Brown wrote in a note. The TNT integration is progressing slower than expected, but is showing signs of re-acceleration as management reiterated expectations of full network interoperability by 2021.
The analyst said investors are likely focused on management's $5.9 billion capex spend in fiscal 2020 and 2021, but this is a sign management is "investing through the point." Management's commentary should be seen as drivers of future profit growth and management also indicated it could slow down its spend if conditions deteriorate.
Heading into Tuesday's print, BMO Capital Markets analyst Fadi Chamoun said the bullish case for FedEx's stock was based on long-term EBIT margin improvement opportunity in Express and the stock's low valuation. However, it's now evident that near-term problems are worse than expected and any visibility towards an inflection point is minimal.
"While we still have a positive bias for the long-term merits of the FDX investment thesis and valuation is inexpensive given depressed earnings, we would like to see the macro environment improve and/or dividends from ongoing investments become more visible to revisit the rating," the analyst wrote in a note.
KeyBanc Capital Markets analyst Todd Fowler said FedEx's report is dominated by a weaker international outlook, a negative mix shift in Ground margins, and high near-term investments in the business. After multiple quarters where execution is "elusive," investors may want to shift to the sidelines despite a valuation which may reflect a portion of headwinds.
Ratings And Price Targets
- Morgan Stanley maintains at Equal-Weight, price target lowered from $131 to $120.
- Credit Suisse maintains at Outperform, price target lowered from $175 to $168.
- Raymond James maintains at Outperform, price target lowered from $190 to $175.
- BMO downgraded from Outperform to Market Perform, price target lowered from $190 to $165.
- KeyBanc downgraded from Overweight to Sector Weight, removed $190 price target.
Shares of FedEx traded lower by 13.5% at $149.80 Wednesday afternoon.
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