FedEx FDX is releasing its earnings Tuesday (6/25) after the bell. The market has been disappointed with the last 5 quarterly releases, with FDX sliding following each quarterly report. FDX is expected to report $17.8 billion in revenue with EPS estimates of $4.81, representing 3% sales growth but an earnings per share decrease of 18.6% year-over-year.
Analysts have been adjusting earnings down due to increasingly negative outlook pushing this stock down to Zacks Rank #4 (Sell). I believe that a lot of this negative sentiment is hinging on the escalation of trade disputes along with the impending economic slowdown, which would directly impact the shipping business adversely due to the associated output decrease.
The TNT Express acquisition in 2016 for $4.4 billion was meant to expand FedEx’s international presence to rival top competitor, UPS UPS, who has already established global distribution. FedEx Express, which includes TNT, is now able to service 220 countries making up 99% of the world GDP.
Weaker than expected international growth over the past year or so, along with some systemic cost concerns, have been dragging FedEx down with TNT. FedEx Express isn’t producing the same top-line growth that it anticipated with soft European and Chinese output. This segment saw a 7% year-over-year decrease in operating income as revenues and margins are pinched.
Amazon Effect & Broader E-Commerce
FedEx announced earlier this month that it would not be renewing its US air delivery contract with Amazon AMZN and emphasized how little they rely on them for their top-line, quoting that Amazon only makes up about 1.3% of revenues and are not concerned about Amazon’s in-house delivery. For a company that is stressing the importance of growing their e-commerce exposure, this is a very precarious move, with Amazon controlling almost 50% of the US e-com market.
UPS, on the other hand, relies on Amazon a bit more with somewhere between 5-8% of its revenue being driven by them. Handling north of 20% of Amazon’s volume. UPS is more deeply ingrained in e-commerce delivery with this driving the largest portion of their growth. UPS shipments currently make up more than 50% of the total business-to-customer deliveries in the US.
Amazon is shifting its focus to develop an internal delivery service, with initial rates appearing to be cheaper for them in-house, although there is some speculation to whether these figures are misconstrued. None the less, with the threat of the US’s largest e-commerce business shipping their products in-house could bring UPS and FedEx to their knees.
Performance & Valuation
FDX has lost over 31% of its value over the past 52-weeks underperforming the closest benchmarks by a considerable amount. This can be substantially attributed to TNT’s weak performance. UPS has lost over 9% over the same time frame, unable to fully recover from the equity market drop off at the end of 2018.
FDX is trading at one of its lowest forward P/E multiples since 2011, with a P/E valuation of 10.2x below UPS’s 13.3x and the shipping industry’s 12x.
I am not implying that this discounted valuation means that FDX is a buy. I am only illustrating that the market has priced out a lot from this stock and if systemic issues can be resolved this firm would make a good investment at the price.
FedEx analysts are estimating conservative financial results for the earnings release tomorrow, as a pessimistic tone shakes the shipping sector. With the last 5 quarter releases having a negative price impact on FDX, traders & investors are preparing for a miss with the stock dropping 2.7% just today. Look for positive FedEx Express as well as robust forward guidance which will both be driving this stocks price impact tomorrow after the bell.
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