Last week, FedEx (FDX -0.73%) suffered four analyst downgrades and a 14.5% decline in its stock price after the shipping and logistics giant missed on both revenue and earnings per share in its recent earnings announcement for the first quarter of fiscal 2020. FedEx also lowered fiscal 2020 guidance, blaming just about everything, including lost customers, a global slowdown, trade tensions, and an impending recession. With little on the surface to smile about, should investors reconsider FedEx's long-term potential, or does this new 52-week low signal a buying opportunity?
Toil and trouble
FedEx's woes are nothing new. The company has missed earnings per share in two of its last four quarters. On the recent earnings call, CEO Fred Smith noted that "beginning in the fall of 2018, it had become clear that global trade disputes were adversely affecting manufacturing in Europe and Asia, thereby slowing international shipping demand." Due to its size and influence, FedEx is known as a bellwether for both the US and the global economy. Its recent dismal earnings and poor forecast are frightening for the short-term prospects of the broader stock market due to the company's global reach in freight, ground, and air shipping, as well as its logistics, services, and office business segments.
What a global economic slowdown would look like for FedEx
Recent earnings misses and a lowering of the guidance for fiscal 2020 are serious concerns for investors. Additionally, many headwinds could potentially affect FedEx in the short term. Tariffs or other taxes on imports are a disincentive for countries looking to trade with one another. Weak economies mean less spending, which means less shipping. Think about domestic shipping and trade. Companies like Walmart would need fewer items on their shelves because purchase volume would decrease. Car and home sales would go down, meaning fewer shipments. The supply of chemicals needed in a laboratory, for example, would fall. Shipping and transporting heavy industrial equipment through FedEx freight would also go down. The possibilities are literally endless, but the takeaway is that a global slowdown, trade tensions, and especially a recession would hurt FedEx in the short-term.
Hypotheticals are one thing, but FedEx made it a point to mention that the United States and Europe are currently in an economic contraction due to a falling Purchasing Managers' Index (PMI). The Purchasing Managers' Index is a good indicator of the direction of economic trends in the manufacturing and service sectors. PMI is a number from 0-100, with any number less than 50 signaling an economic contraction and any number above 50 signaling expansion.
FedEx noted in its presentation slides that the U.S. Manufacturing PMI fell below 50 in mid-2019 and that the Eurozone Manufacturing PMI , as reported by IHS Markit, has been below 50 since the beginning of 2019. Both indexes were around 60 in late 2017 and early 2018. FedEx stressed the negative sentiment in two of its largest markets as a primary reason for recent challenges.
FedEx has been spending a lot of money in the short term in an effort to grow e-commerce as well as FedEx Extra Hours, an express service that provides nightly pickup with delivery the next day, and FedEx Ground six- and seven-day delivery. "We plan to add capabilities to enhance our services toward the rapidly growing e-commerce market, which we expect to grow in the United States from 50 million to 100 million packages per day by 2026," said Smith. FedEx hopes that FedEx Extra Hours will help the company lead as e-commerce grows in scale, volume, and convenience. "By the end of this fiscal year, FY20, we will have significantly repositioned FedEx for strong future earnings," said Smith.
FedEx is beaten and battered, hopeful for the future, but not reckless. The company understands that it should cut capital expenditures if a recession truly takes form. "Assuming no recession, we will continue the initiatives announced in May and June, with confident optimism about FedEx's long-term future competitive position and industry leadership," said Smith. FedEx notes that domestic e-commerce is estimated to account for over 90% of total market volume growth through fiscal 2026, with 56% of that growth projected to be addressable by FedEx.
Why FedEx just did you a favor
This isn't FedEx's first rodeo. The cyclical nature of economic cycles is simply part of its business model. FedEx continuously mentions that the headwinds of an economic contraction in the manufacturing and services industries are already upon us, indicated by a less-than-50 PMI in the United States and Europe. FedEx reported diluted earnings per share of $2.84, 8% lower than its earnings of $3.10 in Q1 of fiscal 2019. Still, the company is guiding for $10 to $12 of diluted earnings per share in fiscal 2020. The current price of the stock is hovering around $150, giving the company a forward P/E of 15 to 12.5.
Foolish investors will recognize that the stock's recent bludgeoning has done them a favor. Even in difficult times of slowing or even negative year-over-year growth, FedEx is a cash cow that carries a low valuation and sports a $2.60 annual dividend. For investors willing to weather economic cycles and invest for the long term, FedEx's commitment to growing its e-commerce business, as well as the promise of capital discipline during a recession, makes FedEx worth considering for investment.