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Why Shares of FedEx Are Falling Today

By Lou Whiteman - Mar 3, 2020 at 3:08PM

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An analyst warns that the COVID-19 coronavirus outbreak is likely to weigh heavily on upcoming quarterly results.

What happened

Shares of FedEx (FDX 7.16%) fell nearly 5% on Tuesday after a Wall Street analyst tried to quantify how the company would be impacted by the COVID-19 coronavirus. This was supposed to be a year of recovery for FedEx, but the outbreak appears likely to put that recovery on hold.

So what

Shipping stocks have been under pressure since the coronavirus first began to flare up in China, with investors worried a slowdown in economic activity in Asia would lead to falling freight volumes globally. As the virus has spread into new regions, the impact on transports has almost surely grown; however, until the outbreak is under control, it is hard to quantify what exactly that impact will be.

Two FedEx trucks at a distribution center

Image source: FedEx.

Morgan Stanley analyst Ravi Shanker said on Tuesday that he expects FedEx to miss expectations when it releases fiscal third-quarter results mid-month and that the company could lower its full-year guidance. The spread of coronavirus "casts a cloud and headlines will continue to drive the stock," Shanker warns.

The weakness comes at an inopportune time for FedEx, which struggled in 2019 due to trade wars and a slowdown in China. The company faced revenue headwinds at the same time it was investing billions to increase its U.S. capacity.

FedEx had hoped to see that investment in U.S. capacity pay off via higher shipment volumes in 2020, but with overall shipping demand curtailed due to the COVID-19 outbreak, that payoff now seems unlikely to materialize as quickly as the company, and its investors, had hoped.

Now what

FedEx was a battleground stock in 2019, with some seeing value in its shares and its long-term prospects, and others scared away by the arrival of new competitors including one-time customer Amazon.com.

I believe the company was oversold last year, and that as FedEx has time to implement its cost-cutting plan and integrate its investment in capacity into its system, results will rebound. But that is going to take time, and the coronavirus impact only stretches the timeline out further.

Shanker is correct that results this quarter and perhaps further into 2020 will likely be depressed by a coronavirus-related slowdown. But for investors with a long-term horizon, and the stomach to endure a rocky stretch of road, FedEx is an intriguing stock to watch.

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