FedEx Corporation (FDX) Stock Is Under Pressure Ahead of Q3 Earnings
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"To whom much is given, much will be required." Bible quotes aside, FedEx Corporation (NYSE:FDX) has been given a fat price to earnings multiple of 28.4 by the market. This means analysts covering FDX stock require the company to beat their estimates of at least $2.64 per share in profits when the company reports earnings after the bell Tuesday, March 21.
The "whisper number" is for earnings of $2.68 per share, on revenues of about $15 billion. Given FedEx's recent post-earnings volatility, that may be the real target.
While FDX stock has gained almost 19% in value over the last year, the reaction to its last earnings report in December - net income of $700 million or $2.59 per share of earnings on revenue of $14.93 billion - was decidedly negative. Estimates for this quarter are not much better.
Meanwhile, FedEx shares have been scrambling to reach their pre-earnings high since December, and had just gotten there when trading opened March 20.
The lesson should be clear: Beat the number, preferably by a lot, or pay the price.
Most analysts think FedEx can do just that, with a majority having it on their buy lists and two moving there just since the last earnings report.
But while most analysts are sanguine, a growing minority are worried. It's not just that the comparison with United Parcel Service, Inc. (NYSE:UPS) may no longer be so rosy.
It is the looming threat of Amazon.com, Inc. (NASDAQ:AMZN) that has the analysts worried. The online retailer is building out its own delivery services, with trucks, planes and even an airport lease near Cincinnati that let it, at minimum, further arbitrage FedEx' pricing and, at most, replace it.
The online giant is already replacing FedEx through its Prime Now service - a same-day delivery option in selected markets that now includes food from restaurants, and in some locations, alcohol.
Same-day and fresh offerings are things FedEx can't match. The real fear is that Amazon may, on its own schedule, delete FedEx entirely. Both FedEx and rival UPS, as well as the U.S. Postal Service, have become dependent on Amazon in recent years - postal service employees will even rush out with Amazon packages on Sundays - so Amazon's growth in deliveries needs to be taken as seriously as a heart attack.
Staying Ahead of Amazon
The best way to compete with Amazon's ambitions is for FedEx to stay ahead of it, as with its expansion of next-day delivery to 4,400 new zip codes and the recent acquisition of TNT Express, the world's fourth largest delivery player.
Another area of potential growth is Asia - one reason FedEx is shipping giant pandas from China. That's all PR, but its other moves to improve services to China and Japan are not. FedEx is now expanding across Asia, even offering shipment tracking in difficult markets like India.
For FedEx bulls, this kind of news must be key to their view: FDX getting into more markets, with faster deliveries, and eventually buying market share ahead of Amazon to keep growing.
The Bottom Line on FDX Stock
My guess is that FedEx will handily beat estimates, but that doesn't make me a buyer.
It's hard for me to pay an Alphabet Inc (NASDAQ:GOOGL) price-to-earnings multiple for a company whose most profitable operations can so obviously be stolen by one of its own customers. Global trade growth is going to slow under President Donald Trump, and documents are becoming less-and-less important in the age of the internet. Thus, the longer-term for FDX stock looks very challenging.
FedEx may have to fight hard to just stay in place. And while the long-term future to me looks bright, the medium-term future seems filled with darker clouds.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he was long AMZN and GOOGL.
This article was written by Dana Blankenhorn for InvestorPlace on Mar 20, 2017.
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