Can FedEx (FDX) deliver on earnings to revive the stock price? Currently priced at around $246, FedEx shares are trading more than 23% below their 52-week high of $320. Notably, this is despite the company enjoying stronger-than-expected business activity, particularly in e-commerce volumes and domestic parcel capacity. But is now a good time to buy the stock?
That question, among others, will be answered when the company reports second quarter fiscal 2022 earnings results after the closing bell Thursday. Amid what appears to be short-term headwinds related to labor shortages and supply chain bottlenecks, FedEx stock has suffered immensely since the company reported second quarter results. Although Q1 revenue rose some 14% year over year, reaching $22 billion, FedEx posted 9% decline in adjusted operating income which fell to $1.49 billion.
The company cited a challenging labor environment, including higher labor costs, which pressured its margins and created inefficiencies. Since then, the stock has fallen more than 30% from around $315 to a recent low of $217. It would appear, however, that the company has established some support around that area. Since the October low, the share price has risen as much as 17%. The company has taken aggressive steps to address its labor shortage. The question is whether this will yield meaningful improvements in the bottom line.
Often seen as a bellwether for the overall health of the economy, FedEx’s revenue and profit forecast will be closely watched, mostly for any indication of of inflationary pressures. And given that the company is now operating in the all-important holiday quarter, on Thursday investors will want to hear increased levels of optimism about profitability improvements within e-commerce and FedEx’s Ground segment. FedEx must also guide in a manner that suggests that the improvements shown will be sustainable.
In the three months that ended November, analysts expect the Memphis, Tenn.-based company to earn $4.25 per share on revenue of $22.44 billion. This compares to the year-ago quarter when earnings came to $4.83 per share on revenue of $20.56 billion. For the full year, ending May, earnings are projected to rise 8% year over year to $19.63 per share, up from $18.17 a year ago, while full-year revenue of $91.01 billion would rise 8.4% year over year.
On a year-to-date basis, FedEx stock has fallen 5%, while the S&P 500 index has risen some 24%. FedEx adjusted EPS for fiscal 2022 has gone down, suggesting there is still sine caution being applied which explains why the stock has been on the decline. Among other things, analysts are questioning whether rising labor costs will hurt the company’s profit margins. The market also wants to see how the company’s e-commerce segment performs. Growth has moderated in recent quarters.
In the first quarter the company missed on the bottom by 55 cents, with EPS coming in at $4.37. Operating income fell 9% year over year to $1.49 billion, while operating margin rate of 6.8% missed the 8.5% consensus. That sent the stock plunging by double digits, despite revenue rising 14% to $22 billion, ahead of estimates by $105 million. FedEx Ground suffered due to higher labor costs and network inefficiencies, which negatively impacted operating income by about $320 million.
With the stock trading about 23% below its consensus price target of $303, FedEx looks like a solid bargain. For any of this to matter, however, on Thursday investors will want to see profitability improvements and an update on the labor shortages and upbeat comments about supply chain constraints.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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