Until early March, the transportation sector as measured via the SPDR S TR/S&P TRANSN (NYSEARCA:XTN) exchange-traded fund had been outperforming the S&P 500 Index. In the wake disappointing earnings from FedEx Corporation (NYSE:FDX), which came on top of lowered full-year guidance at the end of 2018, the ETF and the individual stock were both dragged down. Add to that overall concerns of a slowdown in global growth and you are left with a recipe for negative market sentiment across logistics providers as a whole.
As we saw with the brick-and-mortar retail sector, macro concerns over their future weighed heavily on the sector throughout late 2017 and early 2018. When the market came to its senses and realized that not all retail stores would go the way of the dodo, companies like Macy’s (NYSE:M) rallied sharply — almost 100%, in Macy’s case.
Sometimes when the market perceives situations as horrible and things go from there to merely bad, there is serious money to be made.
Major issues that have been depressing FedEx stock are either priced in or are short-term, providing far-sighted investors with the opportunity to purchase FDX at a reasonable 13 times earnings (historically, north of 15 times would be more in keeping with the norm). Keep in mind that as recently as last October, FDX traded at $240 per share, or 32% higher than current levels.
What’s Weighing on FedEx Stock
One of the macro issues has been the global growth concern. However, China’s recent March PMI numbers should assure the market that the world’s second-largest economy is not in dire shape by any means. The official PMI number rose to 50.5, representing a 1.3% growth month-over-month. At least for now, global growth based on the manufacturing indicator may be slowing but is not going negative.
A deterioration in global trade would of course hurt FDX disproportionately, but that risk seems largely unfounded based on the PMI data.
TNT & Amazon
Another major worry surrounds the TNT acquisition. It may well have been a mistake, but the worse-case scenario is already priced in at current FedEx stock levels — namely, a lack of profitability and integration issues. I would add that FedEx appeared to be very disciplined in closing that transaction.
United Parcel Service (NYSE:UPS), its primary competitor, was ready to pay almost $7 billion dollars for TNT, where FDX closed the deal $2 billion lower below $5 billion. I suspect patient investors will see FedEx work through the integration pains — M&A is rarely smooth with such large companies — and see good returns on capital for their investment in the business.
Another worry is that Amazon (NASDAQ:AMZN) will be entering the space and eating FDX’s lunch. This feel likes a broken record playing over and over again. It’s what plagued the retail sector, and now that headline risk has shifted to logistics.
While transportation and logistics is a growing part of AMZN’s business that FedEx investors should not ignore, the threat is not immediate. The scale of both FDX and UPS is not easily replicated. Amazon’s existing network is simply not in the same league and would require a huge capital expenditure push, especially in non-metropolitan areas.
It’s true that AMZN is pushing forward, like the announcement in February about Amazon Air’s fleet expansion, but remember that global transportation and logistics is not a finite pie. It can absorb new players on the domestic and international level while allowing for growth among existing players.
Ultimately, this play comes down to current valuation. FedEx stock is pricing in a horrible scenario, but the reality is likely to be merely bad, or even not-so-bad-at-all.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
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