Shipping giant FedEx (FDX 0.86%) reported its second-quarter fiscal year 2020 (Q2 FY2020) earnings on Tuesday. They were, wait for it, another disappointment, sending shares 10% lower on Wednesday. Here's everything you need to know about FedEx going forward.
FedEx has an earnings problem
If there's one way to cripple investor confidence, it's repeatedly disappointing on earnings. For the past eight quarters, meaning Q3 FY2018 to Q2 FY2020, FedEx stock has fallen the day after. Every. Single. Time.
|
Fiscal Quarter |
Expected EPS |
Actual EPS |
Percentage Stock Price Change The Following Day |
|---|---|---|---|
|
2Q 2020 |
$2.79 |
$2.51 |
-10.03% |
|
1Q 2020 |
$3.17 |
$3.05 |
-12.92% |
|
4Q 2019 |
$4.81 |
$5.01 |
-0.53% |
|
3Q 2019 |
$3.10 |
$3.03 |
-3.50% |
|
2Q 2019 |
$3.94 |
$4.03 |
-12.16% |
|
1Q 2019 |
$3.81 |
$3.46 |
-5.53% |
|
4Q 2018 |
$5.72 |
$5.91 |
-2.70% |
|
3Q 2018 |
$3.08 |
$3.72 |
-1.18% |
Data Source: Yahoo Finance
Last quarter, FedEx blamed just about everything, including lost customers, a global slowdown, trade tensions, and an impending recession. This quarter, FedEx missed earnings, revenue, and guided down the full fiscal year, citing concerns over economic conditions and the bad timing of the Thanksgiving holiday.
Image Source: Getty Images.
It was the hope of many FedEx investors that the company would be benefiting from its investments in e-commerce by now, but it seems FedEx is still in growth mode. "As we announced last summer, FedEx is aggressively expanding North American packages -- package services for the rapidly growing e-commerce market to include year-round seven-day delivery," said CEO Fred Smith on the Q2 FY2020 earnings call.
FedEx's e-commerce ramp up includes the focus on FedEx Express, now the largest segment by revenue. As of Q1 FY2020, FedEx Express' packages delivered had increased by 50% since 2016, but average revenue per package declined from $19.70 to $18.40 during that period. The increased volume and lower returns can be attributed to FedEx's acquisition of TNT Express, a European shipping company.
An income problem
Although FedEx's revenue only slowed from $17.82 billion to $17.3 billion year-over-year, the main issue was operating income.
|
Segment |
Q2 FY2020 Operating Income |
Q2 FY2019 Operating Income |
|---|---|---|
|
Express |
$236 million |
$630 million |
|
Ground |
$342 million |
$590 million |
|
Freight |
$141 million |
$148 million |
|
Corporate, other and eliminations |
($165 million) |
($200 million) |
|
Total |
$554 million |
$1.17 billion |
Data Source: FedEx
Operating income is strained for a variety of reasons, most notably increased pricing competition and weaker economic conditions. The numbers, along with the guide down to $10.25-$11.50 per share for the fiscal year, show just how much FedEx is struggling on the bottom line.
A comeback?
For the past three years, FedEx and rival United Parcel Service (UPS 2.03%) have both significantly underperformed the S&P 500 index. According to the above chart, FedEx's stock performance has been even worse, losing a quarter of its value over the past three years.
After the recent drop, it could be said FedEx is entering value stock territory. Even after its guide down, FedEx would have an attractive P/E ratio of 12.8 to 14.3 at the stock's current price.
Eight consecutive quarters of post-earnings drops in the stock price is a bad streak that needs to be broken. If FedEx can benefit as much as it hopes to from the integration of TNT and growth in FedEx Express thanks to seven-day shipping, the stock could be a nice turnaround play. If the company can get even close to the $16.79 annual earnings per share it made in 2018, it would be a steal at these prices. In addition to earnings, keep an eye out for a comeback in the company's operating income. Seeing as Q2FY2020 operating income was about half that of the prior year's result, FedEx will have some fairly low comparables going forward. However, if operating income continues to fall with no floor insight, it will be difficult to argue a positive long-term investment thesis for FedEx.
