FedEx Tumbles With ‘Near-Term Overhangs’ From Express, Economy

(Bloomberg) -- FedEx Corp. shares slumped as much as 6.3 percent early Wednesday -- the most in three months -- after the shipper lowered its annual profit view for the second time in three months, citing slowing trends, and Baird said the company’s lack of visibility into global growth rates would continue to pressure the stock. FedEx shares are now back below their 50-day moving average.

“Fiscal third quarter’s weak results weren’t a big surprise, but we recognize that the lack of visibility to a trough in global growth rates and recent lack of clarity to execution in Express remain near-term overhangs to the stock,” Baird analyst Benjamin Hartford wrote in a note to clients.

FedEx had warned of a weak global growth in December when it reported second-quarter results, and had cut its outlook just three months after raising it, suggesting an abrupt change in its view of the global economy. Since the Dec. 18 warning, FedEx shares have recovered slightly and are now down only 2 percent. The broader S&P 500 Index has gained more than 11 percent over the same period, while peer UPS shares have risen more than 13 percent.

And the troubles may continue. “It may be a while before we can call the all-clear,” Morgan Stanley analyst Ravi Shanker said. “We would be surprised if the fourth-quarter headwinds implied in full year guidance were isolated to fourth quarter alone and didn’t continue into fiscal 2020,” he added.

Here’s a round-up of the analyst commentaries after the earnings.

JPMorgan, Brian Ossenbeck

“Mix pressures and labor cost inflation are mounting faster than anticipated at Ground and while we believe FedEx has the industry’s best ‘mousetrap’ to pursue e-commerce growth profitably, we are increasingly concerned operating margins in percent terms will be pressured even if Ground can lower costs fast enough to grow operating profit in dollars.”

“We also believe UPS’s lack of success in bending the cost curve against rising e-commerce and direct to consumer volumes is a cautionary note.”

Cuts to neutral from overweight, price target $202 from $227.

Morgan Stanley, Ravi Shanker

“It may be a while before we can call the all-clear. Bears will point to continued weak results with no indication of easing headwinds on the horizon, while bulls will be hoping that this is the last cut.”

“With a new head of Express just installed, management pointing to higher costs running for longer and significant geopolitical/macro uncertainty on the horizon, we do not expect to get a new target/timing for Express improvement with fiscal 2020 guidance in June.”

“We believe FedEx’s Amazon revenue is largely in U.S. Domestic Express and Amazon could end up being a meaningful percentage of volumes of that segment, and we expect Amazon to potentially open up their networks to third-party packages, which would be a headwind to FedEx beyond the Amazon-only volumes.”

Rates equal-weight, price target $148 from $156.

Citi, Christian Wetherbee

“The quarter was basically in line with our cautious preview, but the composition was
off, as the EBIT miss was driven mostly by Ground vs Express.”

“There is still a story for potential upside a few months out as sell-side estimates fall into range with buy-side targets and the company outlines a path to decent growth in fiscal 2020 (off a low base).”

“Make no mistake, fiscal third quarter was a disappointment, and we don’t believe there is a rush as fiscal fourth quarter plays out, but risk/reward looks favorable and we think a clean slate (including potential write-down) and official fiscal 2020 guidance coming in June
could finally help put in a floor and present a catalyst for upside, assuming a relatively
stable macro scenario.”

Rates buy, price target $210.

Cowen, Helane Becker

“Ground will likely need the rest of the year to lap the rollout of six-day year-round service before margins improve, but long-term the change in the business should drive improved results as the company will only need limited capex to achieve volume growth.”

“The reasons for slower than expected earnings growth are explainable but ultimately concerning to the investment community.”

“We believe we are near a bottom for Express and expect sequentially improving results throughout fiscal 2020.”

Rates outperform, price target $230 from $237.

Baird, Benjamin Hartford

“FedEx has clearly suffered amid the deterioration in global macroeconomic conditions over the past year, with lingering impact from mid-2017’s cyber-attack at TNT compounding the issues.”

Rates outperform, price target $195.

To contact the reporter on this story: Esha Dey in New York at edey@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Scott Schnipper

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