FedEx (FDX) stock is selling off in early trading Wednesday after the shipping giant reported lower-than-expected earnings coupled with underwhelming guidance. With all eyes on the Federal Reserve and its policy meeting, the reasons for FedEx’s weak showing are perhaps more relevant than usual.
You’d think that 2015 would be a year of unheralded success for companies like FedEx and rival UPS (UPS), but both stocks have in fact trailed the S&P 500.
Before this morning’s tumble, FDX was off 11% year-to-date, while UPS shares had slumped nearly 10% from their 2015 open. The S&P, in contrast, is off only about 4% for the year.
Let’s take a quick look at FDX stock and what plagued it in its fiscal first quarter, which ended Aug. 31.
Earnings per share came in at $2.42, up a solid 14% from $2.12 in the year-ago quarter. Still, that wasn’t quite up to par with what Wall Street expected, as analysts anticipated EPS of $2.46. Revenue didn’t surprise much one way or the other, coming in precisely where the pros expected at $12.3 billion, up 5% from last year’s $11.7 billion figure.
But with FDX stock off more than 3% in early morning trading, it wasn’t just a 4-cent miss that had shares all banged up. The company lowered its fiscal 2016 EPS outlook from a range of $10.60 to $11.10 per share to a range of $10.40 to $10.90 per share.
Janet Yellen and her posse might want to listen to this next part, as it relates to the health of the wider economy. One sentence from Frederick Smith, FedEx CEO, is all it takes:
“FedEx Corp. is performing solidly given weaker-than-expected economic conditions, especially in manufacturing and global trade.”
Taken in conjunction with the fact that volume at FedEx Freight was lighter than expected, the bottom line is clear: Demand just isn’t what it should be. Less-than-truckload demand is expected to be lighter going forward, and given the fact that much of its revenue increase was driven by the inclusion of the recent acquisition of GENCO into its results, FDX stock looks like a rather poor bet going forward.
FedEx isn’t reaping greater rewards from lower fuel costs because it charges customers fuel surcharges, which rise and fall with the cost of gas. That means that with weak demand, FDX will have to rely on rate increases to drive revenue growth.
On Jan. 4, 2016, shipping rates will increase by an average of nearly 5% across FedEx Express, FedEx Ground and FedEx Freight segments. FDX will also charge more for FedEx Ground shipments that exceed current limits, and will be “updating certain fuel surcharge tables at FedEx Express and FedEx Ground” in early November, whatever that means for pricing.
At the end of the day, there’s just nothing compelling about FedEx stock after its recent earnings report, and perhaps the Federal Reserve should take these lackluster earnings and expectations into account when its “data-driven” decision on rates is made tomorrow.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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