FedEx stock has already fallen enough to price in weak outlook, analysts say

FedEx Corp. did what investors were afraid of by providing a downbeat profit outlook for the year late Tuesday, but some Wall Street analysts said the stock had already sold off enough to make further downside less likely, analysts said.

And management’s refuting of a report in The Wall Street Journal that big discounts were being offered to lure online merchants away from rivals should come as a relief to investors, the analysts said.

The stock FDX, +1.12%  initially fell as much as 1.8% in after-hours trading on Tuesday, after FedEx reported fiscal fourth-quarter adjusted earnings per share that beat expectations, sales that matched forecasts, but said it expected a “mid-single-digit percentage point decline” in fiscal 2020 adjusted EPS from 2019 adjusted EPS of $15.52. Before the results, the FactSet EPS consensus for 2020 of $16.23 implied 4.5% growth.

But the stock quickly rebounded to end the after-hours session up about 0.7%, then extended gains with a 1.2% rally in morning trading on Wednesday. That puts the stock on track to snap a five-quarter streak of stock price declines on the day after earnings were reported.

On the post-earnings conference call with analysts, Chief Marketing Officer Brie Carere commented on the WSJ report about pricing, saying that while e-commerce will continue to put pressure on yields, with lighter packages moving shorter distances, she sees a “rational” pricing market.

“It is important to note that contrary to erroneous and miss-informed reporting in The Wall Street Journal on June 23, FedEx has made no recent pricing changes, no pricing changes to our strategy, and we have certainly made no changes related to any one customer,” Carere said, according to a transcript provided by FactSet.

See also: FedEx earnings: EPS guidance and conference call to overshadow Q4 results.

Analyst Patrick Tyler Brown at Raymond James cut his stock price target to $190 from $200, but reiterated his bullish outperform rating, saying the recent stock price action suggests investor sentiment had already been “washed out,” leaving “limited room” for further declines in valuation.

The stock had shed 8.0% in the three sessions leading up to the earnings report, and had tumbled 33.5% over the past 12 months to be the worst performer in the Dow Jones Transportation Average DJT, +0.30%  the past year. In comparison, the Dow transports had slipped 3.9% and the Dow Jones Industrial Average DJIA, +0.27%  gained 9.5% the past year.

Brown said in the face of weakness in FedEx’s international Express business, domestically, he remains “optimistic” about the long-term earnings power of the Ground business, and believes Freight can continue to drive earnings growth through freight cycles given its “dominant” terminal network.

“Most importantly however, we were extremely heartened by [FedEx’s] total rebuking of the recent...WSJ article that suggested [FedEx] may lower domestic rates -- though admittedly we found the idea of price concessions in what appears a largely rational pricing environment categorically illogical,” Brown wrote in a note to clients.

Cowen analyst Helane Becker also cut her stock price target, to $206 from $228, but kept her rating at outperform, the stock action since the results indicates investors have already priced in a 2020 earnings decline.

“FedEx is not out of the woods, but base expectations are lower and if there is any shift towards a more optimistic macro environment, we expect shares to move higher from current levels,” Becker wrote.

J.P. Morgan’s Brian Ossenbeck was a little less sanguine, however, saying the expected downbeat earnings guidance and management’s “pushback” on the negative WSJ headline could trigger a “relief rally” in the stock, but that would likely be short lived given the downside risks to international trade policy and slower global economic growth.

He cut his price target to $172 from $184, while keeping his rating at neutral.

Besides the report on price cuts, the WSJ reported this week that FedEx filed a lawsuit against the U.S. government over the order to block shipments to Huawei Technologies Co., after the company botched some deliveries to the China-based company.

Chief Executive Frederick Smith said on the conference call that there was a “considerable amount of miss-reporting” on the issue, as the Huawei packages were only “peripherally involved in the lawsuit. Instead, the lawsuit filed “goes back many, many years,” and concerns requiring FedEx to enforce export controls.

In a statement about the lawsuit out late Monday, the company said: “FedEx is a transportation company, not a law enforcement agency.”

Source: Marketwatch.com

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