FedEx (NYSE:FDX) can't seem to get a win. Dropping Amazon (NASDAQ:AMZN) as a customer, a slowing global economy, increased trade tensions, and a poorly timed acquisition have placed the company in a tough position.
Lowering forecasts for 2020 have scared investors off to the tune of a 40% drop in its share price from its 52-week high of $243 per share. Investors facing a steep share loss are wondering if all the bad news has washed the stock out -- leaving behind a potential value play, or if the worst is yet to come.
The first-quarter earnings release in September showed a quarterly revenue of $17.05 billion, compared to an expected $17.06 billion. In addition, earnings per share of $3.05 came in lower than expected from an estimated $3.15. To make matters worse, management lowered full-year guidance for 2020, revising the earnings per share estimate between $10 and $12. Shipping rates are expected to increase starting January 2020 with a 4.9% increase to FedEx Ground and FedEx Home shipments, and a 5.9% rate increase to FedEx Freight.
In August, FedEx announced that it will no longer deliver packages for Amazon, as Amazon is building its own delivery service -- becoming a direct competitor. Sidestepping the largest e-commerce company in the world, FedEx plans to fill the lost volume with higher profit margin customers like Dick's Sporting Goods (NYSE:DKS) and Walmart (NYSE:WMT). The decision to drop Amazon was strategic, focusing on risk and sustainability in the long-term. Projected revenues from Amazon were 1.3% at the end of 2018. After assuming a lower profit margin, the impact from the decision wasn't the gamechanger for FedEx that investors assumed it would be.
TNT is blowing up
In 2016, FedEx acquired Netherlands-based TNT Express for $4.8 billion, the world's largest air express network and European road network to push against its largest rival, UPS (NYSE:UPS). FedEx had an original cost estimate behind the integration of $700 million, however, costs are starting to reach $1.5 billion, according to its most recent earnings release, which disclosed it was spending an additional $100 million on top of the outstanding spend of $1.4 billion from the date of acquisition.
In addition, shareholders have brought a class action lawsuit against FedEx regarding how FedEx handled the cyberattack on TNT in December of 2017. The lawsuit states that FedEx management remained optimistic about the issue while the attack crippled operations and destroyed share value. The cyberattack took place in the middle of the integration into FedEx's infrastructure. The acquisition looks to be a large problem for FedEx, one that management will have to spend their way out of.
The sky isn't falling
After taking the bad news into account, there is a massive opportunity at hand -- the continuing growth of e-commerce. Global e-commerce transactions are projected to grow at a rate of 20% CAGR into 2022, with a target spend of $5.8 trillion, according to a research report by 451 Research. The size of this opportunity isn't small, as 2018 global e-commerce spending was estimated at $2.86 trillion per Digital Commerce 360. Growth in e-commerce spending directly impacts FedEx due to the increasing demand for parcel shipments. Future earnings releases will show how FedEx is keeping up with parcel growth, managing profit margins while handling additional volume.
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Comparing price-to-earnings ratios between the two companies is only useful when companies operate in the same industry and have similar business models. UPS is the closest logistics business to FedEx because its revenue growth, gross margin, and capital spending are similar. Looking at the forward price-to-earnings ratio, FedEx is a better value at 12.13, while UPS has a forward P/E of 15.59.
FedEx has taken a beating, however, there is value for opportunistic shareholders wanting to take on marginal risk for a potentially big reward down the road. As global e-commerce spending continues to grow, the rising tide will lift all boats, FedEx being one of the largest to benefit.