FedEx Drives Its Turnaround Into The Ditch
Vincent Martin | Sep 20, 2022 11:34
- FDX stock plunged last week after providing downside guidance for its fiscal first quarter
- The cut in earnings alone brings value into question — but that’s not the biggest risk
- The U-turn in sentiment in a matter of weeks should raise real concern
Up front, I got FedEx Corporation (NYSE:FDX) wrong. In early July, I thought FDX stock was an intriguing play.
In my defense, I also noted it was a risky play. And on that front, I was correct. FDX stock plunged last week. The 21% decline on Friday was the stock’s biggest downward move ever. Deutsche Bank called the report "the weakest set of results we’ve seen relative to expectations in our ~20 years of analyzing companies."
Fundamentally, the decline doesn’t necessarily seem like an overreaction. FedEx’s estimate for first quarter earnings of $3.44 was one-third below analyst consensus of $5.14. FedEx also pulled its guidance for the full fiscal year.
In that context, a 21% decline seems reasonable. Earnings this year may well come in 20%-plus below expectations, providing a new, lower, base for growth.
Source: Investing.com
But it’s not just the fundamentals that are a problem here. FedEx long has struggled with management and execution. In early July, FDX stock had gained a 3% total over five years. Shares of United Parcel Service (NYSE:UPS) increased 67% over the same stretch.
FedEx’s acquisition of TNT Express in Europe ran into problems, and the decision not to partner with Amazon.com (NASDAQ:AMZN) in North America led to a lost market share.
Investors bullish on FDX stock this summer — again, myself included — believed the company’s execution would improve. The arrival of activist investor D.E. Shaw buttressed those hopes.
But the ugly Q1 numbers suggest this is the “same old” FedEx. If that’s the case, FDX stock isn’t cheap enough.
h2 June Versus September/h2There’s one huge reason for concern with the Q1 numbers. In late June, FedEx held its Investor Meeting. The previous week, FedEx had given solid guidance for fiscal 2023 (the same guidance that was withdrawn last week). And at the meeting, FedEx management was hugely optimistic.
FedEx guided for annualized adjusted earnings per share growth of 14-19% through fiscal 2025. And while analysts were somewhat skeptical of those targets, there was a real sense that if FedEx could even near its goals, the stock had an enormous upside. Indeed, at the time, the average Wall Street price target was close to $300.
h2 What Happened In Q1?/h2
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What’s incredible, and concerning, about the Q1 miss is that when FedEx management was given a rosy three-year outlook, the company already was four weeks into its disastrous quarter.
Performance for Q1 as a whole came in well below the expectations of both the company and analysts. But the massive miss — again, one that an analyst called the worst in the market in two decades — apparently was 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 didn’t really understand what was going on with its business. That’s not likely to be entirely true — a company like FedEx knows what its revenue is every single day — but executives certainly weren’t on top of the situation.
Fundamentally, then, we know that FedEx’s business absolutely collapsed in the last two months of the quarter. And we know that a company with long-running management concerns did not see that collapse coming at all.
On June 29, executives were giving a multi-year outlook that well could have led the stock to double. The stock is down 32% since then. It’s now down 25% over the past five years; UPS has rallied 54%.
h2 Is FDX Stock Cheap?/h2In that context, it’s difficult to get terribly excited about FDX. Were Q1 EPS to hold for the rest of the year, full-year adjusted EPS would come in under $14. That suggests a 12x earnings multiple or so — hardly out of line relative to the stock’s multi-year range.
FedEx does have cost cuts on the way that presumably could help profits in calendar 2023. Even so, the stock looks possibly cheap fundamentally, but hardly a steal.
Indeed, the fundamental profile here essentially is the same as it’s been for years. FedEx has been a play on execution improving, profit margins expanding and revenue growth stabilizing.
That’s what FedEx was promising in late June. But as has been the case so often in recent years, the promise was broken.
Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.
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