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Analysts Downgrade FedEx After Earnings Miss

By Rich Smith – Sep 18, 2019 at 2:35PM

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Yes, earnings were bad -- but FedEx's management may be even worse.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

FedEx (FDX 1.44%) whiffed on earnings last night. The downgrades began arriving shortly after.

Announcing after close of trading yesterday, the shipping specialist reported its fiscal Q1 2020 earnings results, and "down" was the word of the day: 

  • Revenue: down a fraction of 1%.
  • Operating profit: down by 60 basis points.
  • Net income: down by about $90 million from fiscal Q1 2019.
  • Profits: down more than 8% to $2.84 per diluted share ($3.05 per share, pro forma).
Woman leaning down to pick up package at front door

Image source: Getty Images.

Earnings arrive...

The numbers fell a bit below what Wall Street had forecast -- $17.05 billion in sales versus the expected $17.06 billion, with per-share adjusted profits $0.11 short of the consensus. But that isn't the main reason FedEx stock is trading down today. You see, in addition to missing on earnings in Q1, the company also cut its guidance for the remainder of the year.

As management at the package transport specialist explained, "increased trade tensions and additional weakening of global economic conditions since the company's initial fiscal 2020 forecast in June" are necessitating a $1 reduction in adjusted per-share profits guidance to somewhere between $10 and $12.

This reduction comes despite the fact that FedEx also announced a rate hike of about 5% to 6% on its services, effective Jan. 6, 2020. And it's before counting the effects of an anticipated "retirement plan accounting adjustment," which could further reduce earnings per share this year.

...and downgrades follow

As you might expect, Wall Street wasn't pleased with the news. (Nor were investors. FedEx stock is already down some 12% in morning trading.) So far, data shows at least four separate analysts downgrading FedEx, with several more cutting their price targets.

Here's a quick sampling of some their comments:

  • BMO Capital (downgrading to market perform): FedEx missed on earnings and cut its guidance by about 18%. If this were a one-time thing and quickly fixed, that might not be so bad, but right now, "visibility into a positive inflection point in fundamentals is limited."
  • Stifel Nicolaus (downgrading to hold): If "all goes well," FedEx might bounce back from today's decline and reach perhaps $180 a share next year. If it doesn't, the stock could fall even further than it already has.
  • Morgan Stanley (cutting its price target to $120): FedEx is cheaper after today's sell-off, and its guidance may set a new floor to how little the company might earn this year. Still, "trough earnings alone is not a reason to buy the stock," and there's no way to know for sure that FedEx will bounce back and resume growing earnings in fiscal 2021 -- or beyond.

The deepest cut

Bad as all that sounds, though, it was megabanker Deutsche Bank that delivered perhaps the deepest cut.  

Downgrading FedEx shares to hold with a $142 price target, Deutsche blasted the company's Q1 earnings and its full-year guidance as "very weak." Worse than the numbers themselves, though, is FedEx management's "lack of acknowledgement" of "its own execution failure."

As Deutsche explained, FedEx has overspent on buying new airplanes and gotten itself involved in "acquisition debacles." (I think they're talking about you, there, TNT.) All this has contributed to not just weaker profits, but a debt load that's now $15 billion bigger than the company's cash on hand. But instead of fessing up to its mistakes, executives basically just blamed the economy.  

And yet, it's been less than two months since FedEx archrival UPS beat analyst projections for its sales and earnings, despite doing business in the face of the very same "weakening global macro environment driven by increasing trade tensions and policy uncertainty" that FedEx blamed for its problems. And in contrast to FedEx's lament, UPS reported rising sales and reaffirmed its full-year guidance.

Viewed in that context, FedEx's blaming the economy for its problems rings a little hollow. You can almost see the Deutsche analyst shaking their head, as they wish management would simply admit it made mistakes, "tak[e] responsibility for recent performance and clearly articulat[e] a credible path to better results."

It likely wouldn't erase the 12% loss FedEx shares are enduring today, but a better mea culpa from management might at least take away some of the sting.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends FedEx. The Motley Fool has a disclosure policy.

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