Down Over 50%, Is FedEx Stock a Buy?

Last Friday, FedEx (NYSE: FDX) stock suffered its worst single-day percentage decline in its history -- closing the trading session down 21.4%. At the worst point during the Sept. 16 sell-off, FedEx stock was down over 24%, falling to levels not seen since June 2020. The stock is now down over 50% from its all-time high.

Is now the time to buy FedEx stock, or does the sell-off mark the beginning of more pain ahead?

Person applying a shipping label to a package.

Image source: Getty Images.

Making sense of the sell-off

The steep sell-off came in response to FedEx's pre-released first-quarter fiscal 2023 earnings and guidance. The report was nothing short of a disaster as FedEx's diluted earnings per share (EPS) guidance for Q1 fiscal 2023 came in at just $3.33 compared to analysts' average estimate of $5.14 per share. Even the most pessimistic estimate was for $4.42 per share. When a company misses the low end of analysts' earnings guidance by 25%, it's understandable that investors are going to be upset.

FedEx blamed softening demand and rising costs for its lackluster quarter. While these headwinds are understandable, the bigger issue is that FedEx's commentary was a complete flip-flop from its upbeat tone and strong guidance from its fourth-quarter fiscal 2022 release.

Just three months ago, FedEx guided for full-year fiscal 2023 diluted EPS of $22.50 to $24.50 -- which would have easily surpassed the company's all-time-high annual diluted EPS of $19.45 per share in fiscal 2021. Now, FedEx is suspending that guidance -- leaving it up to investors' imaginations to decide how bad this fiscal year could be.

A dismal outlook

A little bit of detective work indicates that FedEx will likely report full-year 2023 earnings below 2022 levels and far below its record 2021 levels. FedEx's first-quarter 2023 guidance of $3.33 in diluted EPS, paired with its forecast of at least $2.65 for the second quarter, amounts to just $5.98 for the first half of 2023.

By comparison, FedEx booked $9.26 in the first half of its fiscal 2021 and $7.97 in the first half of 2022. So it would be reasonable to expect roughly $11 to $13 in full-year 2023 diluted EPS -- or about half of FedEx's previous full-year guidance.

If there were ever a time for FedEx to suffer its worst single-day percentage decline in history, Friday would have been it. It's hard to believe that conditions worsened this badly in just three months. Rather, it seems that FedEx was simply too optimistic in its prior forecast.

FedEx's forecast was so painfully inaccurate that it harkens back to when the company was blindsided by the peak of the U.S.-China trade war conflict in late calendar year 2018. The main problem with FedEx is a lack of consistency. It has posted some downright terrible quarters and some impressive quarters. However, its guidance has been poor, meaning investors have been left either pleasantly surprised or disappointed by its results.

To combat weakening margins and lower earnings, FedEx cited cost cuts and other structural changes to drive profits amid slowing demand. It's the same pattern that we've seen in past downturns where FedEx goes from a period of ramped capital expenditures and growth to cutting costs. The company's management continues to pale in comparison to the reliability exhibited by its rival, United Parcel Service (NYSE: UPS).

FedEx could be a good turnaround buy

The cons of owning FedEx stock have never been clearer. Management has failed to forecast the short-term performance of its business accurately. In March, FedEx founder Fred Smith announced he would be passing the role of CEO to Raj Subramaniam, who has so far had a difficult time. FedEx continues to post low margins and operate a more volatile business than UPS.

Despite all this bad news, FedEx remains confident in achieving its financial 2025 targets -- indicating that the slowdown in demand should be temporary. What's more, FedEx stock is now roughly $157 a share. Based on its prior guidance, that would give FedEx a dirt cheap forward price-to-earnings (P/E) ratio of less than seven. But even if FedEx earns around $11 to $13 in diluted EPS for fiscal 2023, it will still have a low P/E ratio at just 14 or so. Put another way, because FedEx stock has sold off, it is cheap even when factoring in the lower earnings.

To top it all off, FedEx's forward dividend yield is now 2.9% -- providing a nice passive income stream while investors wait for the company to turn things around. FedEx remains one of the leading package delivery companies and could be worth watching for investors who believe in the long-term growth of the industry.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FedEx. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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