FedEx stock slumped into negative territory for the year after discouraging earnings news, but some Wall Street analysts see reason for hope.
FedEx stock slumped into negative territory for the year, but some Wall Street analysts see reason for hope.
FedEx stock slipped into the red for the year with a 10% decline on Wednesday morning as investors weighed up discouraging earnings news disclosed Tuesday evening.
Profits fell short of Wall Street expectations, and the stock is trailing far behind both the S&P 500 and the Dow Jones Industrial Average. Yet Wall Street sees signs that the worst is in the past. Barron’s agrees.
lt isn’t a unanimous chorus of support for the big shipping company. Oppenheimer analyst Scott Schneeberger downgraded FedEx (ticker: FDX) stock from the equivalent of Buy to Hold.
He’s calling FedEx a “show me” story, meaning he expects investors to wait for a few quarters to see improvement before buying back into the stock. That means Schneeberger believes shares are stuck in a trading range until either cost cutting produces better results, or global economic growth accelerates, giving FedEx more packages to ship.
It looks as if Schneeberger is the only downgrade. Analysts at Baird and Cowen are more sanguine. Both acknowledge things aren’t great, but they say the fact that the economy seems to have hit a low means this will be the worst period for the shares.
“Management stated that current operating results are near a bottom,” wrote Baird analyst Ben Hartford in a Wednesday research report. “We don’t yet believe industry fundamentals have bottomed, but we see line of sight to a trough in [calendar year] 2020.” He think earnings will reach their low and then recover with the global economy.
Hartford is still watching to see if investment in e-commerce to capture business-to-consumer shipping volumes will yield good returns. Still, he rates shares the equivalent of Buy and left his $165 target price for the stock unchanged. Shares were at $148.05 on Wednesday morning.
“The company is digesting higher costs associated with a shift to 7 day [e-commerce] service,” wrote Cowen analyst Helane Becker in a Wednesday research report. “Costs should start to improve in [the fiscal fourth quarter of 2020] with ground margins expected to be in the teens at that time.”
She said she is encouraged the company is seeing improvement in Europe and Asia. “With a pending trade agreement between the U.S. and China, we expect to see additional green shoots in the coming quarters,” added Becker. She rates the shares the equivalent of Buy with a $185 price target for the stock.
Other analysts on the Street highlighted the damage from high investment spending at a time when global shipping demand is relatively weak.
“Our sense is headwinds from intermediate-term investments are magnified by slower industrial production and global trade, as well as recent customer attrition,” wrote KeyBanc analyst Todd Fowler. Like Schneeberger, Fowler is waiting for the economy to improve, lifting profits margins, to recommend the stock shares. He rates shares the equivalent of Hold but doesn’t have a price target for the stock.
The customer attrition Fowler speaks of is Amazon.com (AZMN). FedEx and Amazon parted ways earlier this year when FedEx decided not to renew a contract, seemingly unwilling to accept the prices Amazon was offering.
“According to Albert Einstein, the definition of insanity is doing the same thing repeatedly and expecting different results,” wrote Citigroup analyst Christian Wetherbee on Wednesday. It’s a clever way to frame the situation: Investors have waited for improvement quarter after quarter, but economic fundamentals continue to get worse.
It doesn’t appear that Wetherbee blames FedEx entirely. He still rates shares the equivalent of Buy and has a $180 price target for the stock.
J.P. Morgan analyst Brian Ossenbeck summed up investors’ skepticism, saying he is giving the company a “standing eight count,” referring to what happens when a referee briefly halts a boxing match to assess whether an overwhelmed fighter can continue.
FedEx “will likely give back a good portion of its recent gains triggered by a trade war detente,” wrote Ossenbeck. “On the positive side, we found the discussion of yield management a constructive change from the goal of becoming the low-cost, high service e-commerce provider.” Ossenbeck rates FedEx stock at the equivalent of Hold; he cut his price target Wednesday to $147, down $7.
So there are upbeat factors the Street is highlighting.
In the end, the aggregate price target for FedEx stock dropped only a couple of dollars, according to FactSet.The fact that it didn’t change much despite the weak results is another sign the stock may have reached bottom.
Barron’s recently wrote positively about FedEx shares, believing the worst was behind the company and, more important, that the stock was trading at a big discount to its average historical valuation. That call looks early, but the tenets of the investment thesis remain unchanged.
FedEx stock dropped about 10% to $146.37 at 1:17 p.m. It’s the biggest drop since Sept. 18, 2019.