Earlier this month, FedEx Corporation (NYSE:FDX) reported earnings. After beating on earnings per share and revenue expectations, FedEx stock initially rallied. In after-hours trading, the gains looked good and bulls were set to profit in the following trading session.
However, FedEx stock behaved very strangely. Not only did bulls profit in the first few hours of trading, but they profited handsomely. FDX stock was pushing through a vital level of resistance, triggering what seemed to be a big breakout.
This would have put shares on course to retest and possibly make new highs in the not-too-distant future. But that didn’t happen and a false breakout crushed bulls’ hope.
Forget the Stock, Think of the Business
So what makes FedEx stock so attractive? It helps that it’s a pillar in the logistics business, a segment that’s only set to benefit as e-commerce continues to grow.
Given that seemingly every retailer from Walmart Inc (NYSE:WMT), Ulta Beauty, Inc. (NASDAQ:ULTA), Target Corporation (NYSE:TGT) and even Kroger Co (NYSE:KR), along with e-commerce players like Amazon.com, Inc. (NASDAQ:AMZN) continue to see strong growth in online volume, the trend looks bullish for FDX and United Parcel Service, Inc. (NYSE:UPS).
E-commerce sales are an obvious driver for shipping stocks because they serve as the middleman between consumer and retailer. As if the trend toward online shopping weren’t enough of a driver, also consider the economy.
As the U.S. and global economies churn out healthy growth, consumers feel more optimistic and they’re spending more. That drives more shipping volume, as does improving business-to-business sales.
Overall, FDX, UPS and others should be on the positive end of these trends.
Valuing FedEx Stock
Of course, FedEx hasn’t been standing by idly waiting for an explosion of online sales to take place. The company has had to pour billions into its business to properly position its supply lines and logistics operations. It will have to continue pouring in billions in the future too.
With that said, analysts still expect earnings to grow an impressive 20% this year, followed up by another 17% earnings growth in 2019. That goes along with 8% growth revenue in 2018 and 5.5% sales growth next year. Those are pretty solid numbers in my view, especially for a company that was just whacked after reporting its quarterly results.
Current estimates call for earnings per share of $14.73 this year, meaning FedEx stock trades at just 15.8 times this year’s earnings estimates. On a forward basis, FedEx trades at just 13.7 times 2019 earnings estimates.
Is the company perfect? No. Management couldn’t give us an accurate earnings guide thanks to uncertainty on its pension accounting adjustments. While operating and profit margins have been steadily climbing higher, cash flow from operations and free-cash flow have been on the decline. There’s also concern about a trade war with China impacting business.
Those would be a few negatives to consider. But knowing that FedEx is a pillar in our logistics framework coupled with its low valuation is enough for me to overlook these concerns.
Trading FDX Stock
There’s a sharp downtrend in place acting as resistance, while support currently sits near $230. The moving averages are doing a pretty good job lining up with various support and resistance lines for FedEx stock, as support is right near the 200-day, while resistance is near the 50-day. I circled the spot where FedEx gave us a disheartening false breakout over $255.
The day after earnings, FedEx stock popped over this level with authority and stayed there for most of the trading session before fading late in the day. It’s been caught in a broader market selloff since and now the hope for bulls is that support holds up.
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Should resistance give way, investors can target a move back to its previous highs near $275. A slew of analysts came out with new price targets following the company’s quarterly results. The range of those sit between $274 and $306, while the Street-high price target still stands at $315. Even the lowest target in that range is full of optimism though, sitting about 16% above current levels.
There are multiple targets above $300 and I don’t see why the stock can’t get there as long as the broader market does not have a big pullback. This is a high quality company with solid growth and a reasonable valuation.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long FDX stock.
