FedEx Corporation (NYSE:FDX) is slated to report earnings Wednesday and it better not miss Wall Street’s forecast for a second quarter of a row. After all, FDX stock still hasn’t made it all the way back after missing estimates by a wide margin in the prior reporting period.
Indeed, even since FDX came up short by a whopping 8 cents a share in mid-December, FedEx stock has been both volatile and range-bound. FDX stock fell as much as 9% after coughing up that earnings report and is still about 4% off from that 52-week high.
Yes, the stronger dollar is playing havoc with revenue results at all U.S. multinationals, but FDX also suffered from shrinking operating margins in its ground business and a drop in domestic revenue per package.
Bullish analysts think those issues should now be behind FDX. FedEx has shifted its capital focus to building up its domestic ground net work at the expense of express shipping, because ground is higher margin and less capital intensive. As long as ground can produce outsized growth relative to express, margins and cash flow should improve.
There were some signs of these improvements in the prior quarter, but any good news was lost amid the disappointing top- and bottom-line results.
And make no mistake: ground has to carry the load for FDX as long as the global economy — and China, in particular — remains soft. A slower-growth Chinese economy that depends more on internal consumption and less on exports has been weighing on FDX’s express segment for years.
FDX greatly cut costs in the express business to make up for lower volume, but that’s not a way to grow. A resurgent U.S. economy now affords FedEx a chance to have its ground segment do all the heavy lifting for margins and profits.
FDX Set for Big Profit Increase
Easy year-over-year comparisons should also help FDX this earnings season. Analysts, on average, expect FedEx earnings to grow to $1.87 a share versus $1.23 a share last year, according to a survey by Thomson Reuters. Revenue is projected to increase 4.4% to $11.8 billion.
An earnings beat and some uplifting comments from FDX management could get shares moving again. Even though FedEx stock has been range-bound since December, it’s still be a good holding for some time now. FDX stock is up a market-beating 27% over the last 52 weeks. Its nearly 2% gain for the year-to-date leads the market by about a percentage point.
As an economic bellwether, FDX isn’t going to tell us anything we don’t already know. The U.S. is picking up, Asia isn’t, and Europe is all about unfavorable foreign exchange. As a stock story, however, any sign of margin improvement amid an accelerating ground segment should give FDX stock a big shot in the arm.
Heck, it’s not far off from its 52-week high as it is. A better-than-expected earnings report could easily pull in technical traders just playing the upside momentum.
As for long-term holders of FDX, it’s steady as she goes. FedEx stock has been resilient, it doesn’t appear overpriced, and there’s a good case to be made that margin expansion and increased cash flow will keep FDX stock outperforming the broader market.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
