Just a year ago, FedEx (NYSE:) stock was flying high, even reaching $270 per share at one point. Since then, however, FDX stock has been grounded. Economic concerns have investors fleeing FedEx and some other transportation stocks.
However, not all transports have been hit equally. In fact, some of the rails, like Union Pacific (NYSE:) and Canadian National Railway (NYSE:) are making fresh 52-week highs. This sets up an interesting pair trade opportunity to sell the rails and buy the truck and air delivery service competitors.
But first, what has gone wrong for Fedex stock?
Slowing Economic Outlook
Over the past three quarters, FedEx has lowered its FY ’19 guidance from a starting point of $17.50 into the $16s, and now, of the latest update, just $15.50. That’s an 11% decline for this year’s outlook in a relatively brief period of time. The guidance range for Q4 remains fairly wide as well, suggesting that management is not confident on how this quarter will turn out.
The company blamed several factors for the dramatic slowdown in the earnings outlook. The most important of these appears to be international markets. Non-U.S. revenues failed to come in like FedEx had been expecting. Regardless, management is still upbeat for fiscal year 2020, which kicks off in June of this year.
Some of this is hard to predict. The trade war, for example, has undoubtedly pressured FedEx’s business. Many analysts still expect positive developments on this front within the next couple months. In fact, much of the recent stock market rally has been built on rumors that a China-U.S. deal is drawing near. However, FedEx’s results could remain choppy for a bit until a more global economic upswing takes root.
The crux of the matter here, however, is that the market has drastically overreacted. The company cut 2019 guidance by around 10% and the stock lost more than a third of its value. That’s a highly disproportionate response to the news. That said, you can see why the market reacted this way. FedEx cut guidance each of the last two quarters, rather than delivering all the bad news at once, giving the impression that things are steadily worsening.
Still, the overall magnitude of the drop shouldn’t be exaggerated. On top of that, economic indicators should start picking up again. The Fed has pivoted from a strongly hawkish position back to neutral. Letting easier credit into the economy should help consumer confidence, and thus enable FedEx’s business to pick up.
It’s also important to remember that FedEx has tremendous franchise value due to its powerful brand and entrenched infrastructural advantages. The value of the business doesn’t swing 30% in a year simply because it delivers fewer packages. FDX stock is sharply overreacting to minor economic swings that most people will forget within a couple of years.
Cheap Versus the Rails
The railroad stocks are looking rather expensive at the moment. Most of the sector is trading at or near new 52-week highs and sporting fairly lofty price-to-earnings ratios for a typically sedated sector. Canadian National Railway is at 21x trailing, 18x forward earnings, for example. Union Pacific is at 21x trailing and 17x forward earnings. CSX (NYSE:) is at 20x and 16x, respectively. Against that backdrop, FDX stock really pops at 16x trailing and 12x forward earnings, and that’s even after the stock rallied from $170 to $195 recently.
It simply doesn’t make a whole lot of sense intuitively that FedEx is doing so poorly while the rails are experiencing boom times. Sure, railroads tend to carry more commodity goods, whereas FedEx has more retail and consumer traffic. Still, though, as the economy goes, if consumers aren’t buying as much stuff, the demand for raw commodities will drop as well. Transports tend to trade together as a sector; it’s unlikely that FedEx stock can continue to drastically underperform the rails for long.
Bears on FDX stock can make one counterargument to this line of reasoning. FedEx acquired TNT Express in 2016, which greatly enhanced its market presence in Europe. The European economy remains among the weakest of the major developed players in the world. You can argue that FedEx is unduly struggling due to its heightened European exposure. That said, the rails have exposure to other economies as well, particularly Canada and China, which are not so hot right now either. It hardly seems fair to blame FedEx’s underperformance on non-U.S. exposure.
FDX Stock Verdict
I personally started buying FDX stock in January at $176 per share, and I’ve added to my position since then. While another correction to that level would set up an amazing opportunity to take a position in this global freight leader, the current price is still more than fair.
FDX stock should trade at $250 or higher based on both comparable earnings of other transportation companies and where FDX stock traded last year. Yes, there was a brief recession scare late last year. But it’s over now and the Fed has reopened the cheap money taps again. Don’t miss your chance to get on-board with FDX stock before it makes a full recovery.
At the time of this writing, Ian Bezek owned FDX stock. You can reach him on Twitter at @irbezek.
The post appeared first on InvestorPlace.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.