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Do Long-Term Investors Need to Worry About FedEx?

GuruFocus.com

- By Ishan Majumdar

FedEx Corp. (FDX) announced its quarterly results last week, posting a 40% increase in net profit to $835 million. The resulting earnings of $3.10 per share were well below Wall Street's expectations of $3.46, causing the stock to fall more than 5%. This was the stock's largest one-day dip since March 2013.

Impact of rising tensions associated with the trade war


The tariff tiff between the U.S. and China has put investors on edge. It was previously projected that the recently enacted tariffs would impact less than 10% of FedEx's total volume as U.S.-China trading accounts for less than 2% of the company's total revenue. Fears of further tariffs and a full-blown trade war, however, have made investors nervous, resulting in a heavy selloff after disappointing results.

Increase in compensation costs and the TNT integration struggle

FedEx's earnings were impacted by an increase in employee compensation expenses. The company's management sped up the implementation of the $200 million increase as a result of the U.S. corporate tax cut, causing a reduction of 48 cents per share in earnings.

The company is also having some issues with the post-merger integration process of TNT Express. FedEx acquired the European company in 2016 for $4.8 billion, but management has not been able to generate sufficient synergies to justify the acquisition. To add to their woes, TNT Express became the victim of a cyberattack, which adversely affected its business.

The positive side to the recent dip

There is a silver lining to the stock's recent dip. FedEx is currently trading with a forward price-earninngs ratio of 14.71 and an enterprise value-revenue ratio of 1.16, which is very reasonable compared to competitors. The company has a net margin of 7.16%, which is on the higher side among its peer group, and the return on equity is 26.35%. There is little doubt that the company has created good value for its shareholders.

In addition, FedEx's future looks bright as management is investing heavily in increasing capacity and upgrading its network. The company has also increased its seasonal hiring by about 10% and has added year-round Saturday delivery. Management increased its adjusted earnings forecast from $17 to $17.6 per share to $17.2 to $17.8 per share.

Current price levels

The three-year price chart shows a level of support around the $225 and $200 marks. For potential investors, these appear to be the levels at which the stock could be entered from a long-term perspective. An increase in trade war tensions could result in a further decline in the stock price, so it would be advisable to avoid rushing into an investment in the stock currently. Existing investors might witness temporary dips, but the company's long-term outlook is positive.

Conclusion

FedEx has a number of factors driving the stock price down, including trade war tensions, rising employee costs and the integration of TNT Express. However, most of these factors are temporary in nature. The fact management is investing heavily in its network and capacity increases implies the long-term outlook continues to be positive. Long-term investors need not panic and can confidently hold on to the stock.

Disclosure: No positions.

This article first appeared on GuruFocus.