FedEx stock has been stuck in reverse, and that downhill slide may only accelerate following the company's September 22 earnings release, one analyst warns.
Shares of the logistics giant tanked 13% since the company's investor day on June 29, badly lagging the 8% gain from rival UPS during that same stretch.
At the June event, new CEO Raj Subramaniam offered two bold targets for the company: A 4% to 6% compound annual revenue growth rate (CAGR) through fiscal year 2025 and a 14% to 19% CAGR in earnings per share through the same period.
However, investors continue to be skeptical given the slowing global economy.
The stock's subsequent sell-off has Brian Ossenbeck, analyst at JP Morgan, on high alert for a profit warning when FedEx reports earnings in a few weeks. That could weigh on the stock in the near term.
"We are cautious on FedEx into the F1Q23 earnings release on September 22," the analyst wrote in a recent note. "The stock has underperformed the S&P 500 and XLI since the investor day, which lacked details on how much of the profit improvement goals were tied to cost reductions in FedEx’s control.
Here is what Ossenbeck highlighted in his report to clients:
Price Target: $258 (down from $284 previously)
Rating: Overweight (reiterated)
Ossenbeck's trading setup on FedEx ahead of earnings:
"The closely watched FedEx economic forecast for U.S. GDP has also fallen by -0.7% since the last earnings call while the financial health of the Ground ISP network and preparedness for peak has weighed on sentiment even further," Ossenbeck wrote. "We don’t think a cut to FY23 guidance will be a positive clearing event for the stock, especially at the tail end of an unprecedented volume and pricing cycle. When sentiment is at either extreme heading into the print, a trade leaning against the tide has often worked well in our experience but we aren’t swimming upstream on this print."
A deeper look into investor sentiment on FedEx:
"Most investors we’ve spoken to expect FedEx will cut the FY23 EPS guide to encompass the low end of the current $22.50-24.50 range," Ossenbeck said. "The negativity stems from FedEx's falling economic forecast, year over year declines in Asia Pac air cargo rates and expectations of market share loss in Ground. Potential issues with Ground ISPs service levels and costs during peak have added to the negative sentiment while there is general frustration in the limited catalyst path ahead for the stock."
Why Ossenbeck still likes the stock over the long term:
"FedEx was a beneficiary of increased e-commerce demand after the pandemic pulled forward several years of growth starting in 2020, significantly boosting pricing power in an industry where it was historically lacking," Ossenbeck wrote. "A CEO transition from the company's Founder, Fred Smith, will provide senior management the opportunity to refocus on profitable growth in Ground, improving capital efficiency, and leveraging the TNT integration."
Furthermore, the analyst noted that "FedEx outlined a company-wide profit improvement plan at the 2022 Investor Day which if achieved could drive material upside to estimates considering the FY25 target represents ~55% operating income growth from FY22. The longer term potential of combining Ground/Express facilities under the Network 2.0 framework also could address the longstanding concerns of running a dual-network."
"However, management did not break out the proportion of cost savings within the targets," Ossenbeck continued, "which will likely limit how much credit investors will ascribe to the plan until there are more concrete signs of improving execution."