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FedEx (FDX) Down on Q2 Earnings Miss & Bearish FY2020 View

Zacks Equity Research

FedEx Corporation FDX reported lower-than-expected second-quarter fiscal 2020 (ended Nov 30, 2019) results on account of weak global economy due to escalating trade tensions, higher costs at the Ground unit and loss of business with Amazon AMZN. Simultaneously, the company slashed its fiscal 2020 adjusted earnings outlook on expectations of lower revenues at each of the transportation segments and increased costs due to expansion of 7-day delivery service at the Ground unit (the Ground unit costs are expected to be reduced in the fiscal fourth quarter).
 
The company’s underperformance and its guidance cut made investors jittery. Consequently, the stock declined more than 6% in after-hours trading on Dec 17.

FedEx’s earnings (prior to the year-end MTM retirement plan accounting adjustment and excluding TNT Express integration expenses) are now anticipated to be $10.25-$11.50 per share. The Zacks Consensus Estimate for the same stands at $11.97. Previously, during the first quarter of fiscal 2020 earnings release, the company trimmed its fiscal 2020 earnings view to $11-$13.

FedEx Corporation Price, Consensus and EPS Surprise

Results in Detail

The company’s second-quarter fiscal 2020 adjusted earnings (excluding 38 cents from non-recurring items) of $2.51 per share missed the Zacks Consensus Estimate of $2.79. Moreover, the bottom line plunged 37.7% year over year.

Quarterly revenues dipped 2.8% year over year to $17.32 billion and also lagged the Zacks Consensus Estimate of $17.57 billion. The top line was hampered by loss of business “from a large customer” (supposedly Amazon) and macroeconomic weakness.

Operating income (on an adjusted basis) dropped approximately 49% year over year to $684 million in the reported quarter due to sluggish global economy and elevated costs. Operating margin (adjusted) also deteriorated to 3.9% from 7.5% in the year-ago period.

Segmental Performance

Quarterly revenues at FedEx Express (including TNT Express) slid 5% to $9.08 billion due to lower freight revenues as a result of the slowdown in global economy and certain other factors. Operating income came in at $236 million, down 63% year over year. Also, operating margin slipped to 2.6% from 6.6% in the year-ago quarter.

FedEx Ground revenues rose 3% year over year to $5.32 billion in the period under consideration owing to residential delivery volume growth. Operating income came in at $342 million, slumping 42% year over year while operating margin contracted to 6.4% from 11.5% in the prior-year quarter.

FedEx Freight revenues decreased 4% year over year to $1.84 billion. Segmental revenues were hurt by a fall in average daily shipments. The segment’s operating income also slipped 5% to $141 million. Moreover, operating margin contracted 10 basis points to 7.6% in the quarter under review.

Fiscal 2020 Outlook

Effective tax rate (prior to the year-end MTM retirement plan accounting adjustment) is now estimated to be 23-26% compared with 24-26% anticipated previously. Meanwhile, the estimate for capital expenditures is fixed at $5.9 billion. The company expects to incur heavy TNT Express integration expenses through fiscal 2021 and thereafter.

Zacks Rank & Key Picks

FedEx carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Transportation sector are Allegiant Travel Company ALGT and GATX Corporation GATX. While Allegiant sports a Zacks Rank #1 (Strong Buy), GATX carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Allegiant and GATX have rallied more than 50% and 14%, respectively, in a year.

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Click to get this free report Allegiant Travel Company (ALGT) : Free Stock Analysis Report GATX Corporation (GATX) : Free Stock Analysis Report Amazon.com, Inc. (AMZN) : Free Stock Analysis Report FedEx Corporation (FDX) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research