FedEx (FDX) Up 5.5% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for FedEx (FDX). Shares have added about 5.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is FedEx due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

FedEx Misses on Earnings in Q2

The company’s earnings (excluding 53 cents from non-recurring items) of $4.03 per share missed the Zacks Consensus Estimate of $4.05. However, the bottom line improved 26.7% on a year-over-year basis. Results were aided by growth across all its transportation segments.

Quarterly revenues increased 9.3% year over year to $17,824 million, beating the Zacks Consensus Estimate of $17,712.7 million. Growth was witnessed across all major divisions of the company.

Operating income (on an adjusted basis) climbed 7.3% year over year to $1.33 billion in the reported quarter. Meanwhile, operating margin declined to 7.5% from 7.6% in second-quarter fiscal 2018.

Segmental Performance

Quarterly revenues at FedEx Express (including TNT Express) rose 6% to $9.6 billion on the back of growth in U.S. domestic package volume among other factors. Operating income came in at $620 million, up 3% year over year. Meanwhile, operating margin slipped to 6.5% from 6.6% in the year-ago quarter.

FedEx Ground revenues increased 14% year over year to $5.14 billion in the period under consideration. Volume growth and higher yields aided the segmental performance. Operating income came in at $586 million, up 18% year over year and operating margin inched up to 11.4% from 11% in the prior-year quarter.

FedEx Freight revenues jumped 15% year over year to $1.92 billion. Segmental revenues benefited from higher revenue per shipment and average daily shipments. Also, the segment’s operating income surged 37% to $148 million. Moreover, operating margin expanded 120 basis points to 7.7% in the quarter.

Bearish Outlook

The company has trimmed its earnings per share guidance for fiscal 2019. It now anticipates the same in the range of $15.50-$16.60 excluding pension adjustments and TNT Express integration expenses. Prior view was in the band of $17.20-$17.80.

Capital expenses are still anticipated at $5.6 billion while effective tax rate is expected between 24% and 25%. The company has taken a few cost-reduction initiatives. As part of this endeavor, during the fourth quarter of fiscal 2019, the company anticipates a pre-tax charge of $450-$575 million on account of a buyout program for U.S.-based employees. However, this program is estimated to generate approximately $225-$275 million in savings during fiscal 2020.

Moreover, the company will not be able to achieve its objective of raising its Express segment operating income by $1.2-$1.5 billion in fiscal 2020. Additionally, realization of benefits from TNT Express acquisition will be delayed. This downside is attributable to lower-than-expected express package volume due to weakness in the European economy and a change in service mix induced by the TNT Express cyberattack in June 2017.

The company further stated that the major revenue generating segment’s performance is declining, thanks to a global slow down in trade over the past few months. What’s worse is that there are evidences of the turbulence to persist in the near-term.

How Have Estimates Been Moving Since Then?

Since the earnings release, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -18.29% due to these changes.

VGM Scores

At this time, FedEx has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise FedEx has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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