Amid what appears to be short-term headwinds related to labor shortages and supply chain bottlenecks, FedEx (FDX) stock has suffered immensely over the past two quarters. The stock has suffered declines of 9% and 15% in the respective one month and six months, while falling 16% over the past year. Can FedEx deliver the sort of earnings that can revive its stock price?
That question, among others, will be answered when the company reports third quarter fiscal 2022 earnings results after the closing bell Thursday. FedEx management, over the past few quarters, have been more open about the challenges the company is facing regarding demand, labor and supply chain issues. They’ve provided more granular details with the trends they are seeing; however, with the stock currently down 15% year to date, the company is perceived as being mismanaged in comparison to UPS (UPS).
Reports suggests that FedEx could be the target of an activist investor. "That underperformance versus UPS, particularly given they are similar sizes when it comes to revenues, but obviously the makeup of their businesses is quite different from a profit/margin side,” noted David Faber of CNBC last week. Faber’s comments propelled the stock higher by more than 5%. This is even though Faber later clarified that he doesn't know any activist is coming for Fedex, "but we'll see.”
That’s not the first time report of activism have been rumored. The company has taken aggressive steps to address its many challenges, including labor shortage. The question is, whether its efforts will yield meaningful improvements to the bottom line. In other words, the company has a lot of prove on Thursday. Not only must FedEx beat on the top and bottom lines, it must also guide in a manner that suggests that the improvements shown will be sustainable.
In the three months that ended February, analysts expect the Memphis, Tenn.-based company to earn $4.65 per share on revenue of $23.44 billion. This compares to the year-ago quarter when earnings came to $3.47 per share on revenue of $21.51 billion. For the full year, ending May, earnings are projected to rise 10% year over year to $20.66 per share, up from $18.17 a year ago, while full-year revenue of $93.07 billion would rise 10.8% year over year.
FedEx adjusted EPS for fiscal 2022 has gone down, suggesting there is still some 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.
FedEx’s business features less robust free-cash-flow generation, while it has high operating leverage. This means the company relies on robust revenue to sustain its profit margins. The FedEx Ground segments accounts for 35% of total revenue, though historically segment profits account for between 50% - 85% of the company’s total operating income. In Q2 Ground operating income was 45% of total, which suggests there is room for expansion, assuming the 85% is the top of the band. And this is why the Ground segment is often the focus.
In the second quarter, the company delivered a beat on the top and bottom lines, with operating income rising 33% year over year, with an operating margin of 14.7%. Q2 revenues grew 14% while adjusted operating margins contracted 30 basis points to 7.1% due to higher labor costs. Often seen as a bellwether for the overall health of the economy, FedEx’s revenue and profit forecast on Thursday will be closely-watched, mostly for any indication of of inflationary pressures.
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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