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Will High Operating Expenses Mar FedEx's (FDX) Q4 Earnings?

Zacks Equity Research

FedEx Corporation FDX is set to release fourth-quarter and fiscal 2019 results after the closing bell on Jun 25.

In third-quarter fiscal 2019, the company witnessed a negative earnings surprise of 2.3%. Earnings (excluding 22 cents from non-recurring items) came in at $3.03 per share, which lagged the Zacks Consensus Estimate of $3.10.

In fact, this Memphis, TN-based company has reported bottom-line miss in three successive quarters. Factors like high operating expenses and the intensifying trade spat between the United States and China have been hurting the company’s quarterly performance.

We fear that FedEx may falter in the soon-to-be-reported quarter as well. This is because the challenges confronting the company might persist in fourth-quarter fiscal 2019. Additionally, FedEx’s disappointing price performance over the past three months (down 5%) reflects its struggles.

Moreover, the fact that the Zacks Consensus Estimate for fourth-quarter fiscal 2019 earnings has been revised 9.3% downward over the past 90 days. This further highlights the negative sentiment surrounding the stock ahead of the earnings release.

Our quantitative model too does not conclusively show that FedEx is likely to beat on earnings in fourth-quarter fiscal 2019. Here's why:

FedEx does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — for increasing the odds of an earnings surprise. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if they have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: FedEx has an Earnings ESP of -2.62%. This is because the Most Accurate Estimate is pegged at $4.73 per share, lower than the Zacks Consensus Estimate of $4.86.

Zacks Rank: FedEx’s Zacks Rank #4 is a further dampener and makes an earnings beat even less likely.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Likely at Play

We expect high costs to hurt FedEx's bottom line in the fourth quarter of fiscal 2019. With the package delivery company investing significantly to upgrade facilities at its key divisions, capital expenses are on an upswing. Additionally, integration expenses pertaining to TNT Express are pushing up costs.

We also remain concerned about the escalating trade war tensions between China and the United States as FedEx has Chinese exposure. In January 2018, FedEx had opened a hub in Shanghai to strengthen its presence in China.

The company’s major revenue generating segment, FedEx Express, is expected to dish out a below-par performance in the fourth quarter as was the case in the last reported quarter. Also, segmental revenues are anticipated to be hurt by soft international revenues due to weak macroeconomic conditions and sluggish global trade. Notably, the Zacks Consensus Estimate for operating income at the FedEx Express division stands at $848 million, lower than $990 million reported a year ago.

FedEx’s high-debt levels further add to its woes. These apart, we believe that Amazon.com’s AMZN expansion into the logistics network offering discounted and faster deliveries is a potential threat to FedEx. We expect a commentary on the issue on the fourth-quarter conference call.

FedEx is also expected to shed light on its row with Chinese telecoms equipment maker Huawei, which took place this May. Huawei had accused FedEx of diverting two parcels destined for addresses in Huawei to the United States and attempting to reroute two others. Currently, the Chinese company is reviewing its relationship with FedEx after the incident. Even though FedEx has apologised for the mishap, we believe the final decision on the matter is pending.

However, solid growth of e-commerce is anticipated to boost FedEx’s top line in the quarter to be reported.

Stocks to Consider

Investors interested in the broader Transportation sector may consider the following stocks with the right combination of elements to deliver an earnings beat in the upcoming releases:

Delta Air Lines DAL has an Earnings ESP of +0.63% and a Zacks Rank #3.

Canadian Pacific Railway Limited CP has an Earnings ESP of +3.30% and a Zacks Rank of 3.

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