The fiscal first quarter was a mixed bag for FedEx (NYSE:FDX), with FedEx stock off 3.9% in afternoon trading. This puts FDX’s year-to-date return at about -0.7%.
Let’s first take a look at the good news. In the quarter, revenues grew by 11% to $17.1 billion, compared to the Street forecast of $16.9 billion. There was strength across the main three units of FedEx’s business.
FedEx Express revenues increased by 10%, driven by international and freight volumes, higher freight pounds and improvements in the U.S. domestic package business. As for FedEx Ground, there was a 13% increase and FedEx Freight posted a gain of 18%. Overall, the higher fuel surcharges resulted in better revenues across all these segments.
The earnings, however, were not as encouraging. And this was a key part in the weakness in FedEx stock.
Net income came to $835 million, or $3.10 per share, up from $596 million, or $2.19 per share. When making adjustments for one-time items, the earnings were $933 million, or $3.46 per share. Yet the analysts’ consensus was calling for a much more robust $3.80 per share.
So why the weakness on the earnings? Well, for the most part, FedEx is feeling the pressures from rising wages. During the quarter, there was an 11% year-over-year increase in compensation to $6.3 billion.
Now on a full-year basis, FedEx expects adjusted earnings to range from $15.85 to $16.45 per share, compared to the prior guidance of $15.65 to $16.25 per share.
E-commerce and FedEx Stock
With the holiday season approaching, FedEx is gearing up for a record year, as people continue to shop on e-commerce platforms from Amazon.com (NASDAQ:AMZN), eBay (NASDAQ:EBAY) and traditional retailers. The company has invested significant amounts in its infrastructures, such as with a network of more than 12,000 hold locations and sophisticated automation systems. FedEx also plans to increase seasonal hiring by 10% to 55,000.
But there is another interesting development: FedEx will have six-days-per-week deliveries all year long. Yes, it’s another sign of the pervasiveness of e-commerce — and that customers expect prompt deliveries. Keep in mind that FedEx makes an average of 14 million shipments a day.
Trade and FedEx Stock
When it comes to FedEx stock, the Trump Administration’s aggressive stance on trade represents the biggest risk. The latest volley of tariffs on $200 billion in Chinese goods is just another major uncertainty that could hinder the company’s progress.
So far, it looks like the impact has been contained. The current tariffs impact about 10% of FedEx’s Chineses business, which constitutes roughly 2% of total revenues.
Yet it is far from clear how the Chinese government will ultimately respond. And besides, what could be the disruptions to the global supply chain?
For the most part, it’s tough to gauge, as the situation is fluid. But on the conference call, FedEx CEO and chairman Fred Smith noted:
“The reason it’s worrisome is not because of just the individual dispute, it’s because history is very, very clear that countries that pursue the most open markets are the ones that prosper the most and whose citizens’ income increases the most. Mercantilism does not work. There is example after example of it. People that try to manage economies, particularly worldwide economies from a centrally managed perspective cannot do so.”
Bottom Line on FDX Stock
It’s true that FedEx stock is fairly cheap, with the price-earnings ratio at only 14X. The average price target from analysts is also at $286, which implies 18% upside.
Yet I still think investors should be cautious. The nagging issue is that the trade situation is not clear at all. Let’s face it, the tariffs are large and it seems likely that there will be ripple effects across the global economy. So far now, it’s probably a good idea to hold off on FDX stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
