FedEx (NYSE:FDX) reported earnings last night and investors hated what they saw. FedEx stock is down 7% since yesterday’s close. But the pain started a year ago. Since its all-time highs in January, FDX has fallen more than 32% coming into yesterday’s event. So it is knee deep into a bear market already.
But this is not entirely a FedEx problem. While they showed strength a few months ago, the transport stocks have recently fallen sharply out of favor. It is hard for FedEx stock to rally when the whole sector is correcting.
Then there is the problem of Amazon (NASDAQ:AMZN). This behemoth finally confirmed the rumor that it would be “disrupting” the delivery industry. AMZN is a fierce competitor and Wall Street immediately priced in a discount in FedEx stock on the news. This weekend I saw a PRIME delivery van, which is one of many to come — so the threat is real.
FedEx Earnings
Hopes were that FDX management would deliver an upside surprise on earnings to prove that FedEx is not a broken company but just a broken stock. Instead, I heard a team who is scrambling to right a sinking ship. They are reacting early to serious short-term challenges in a big way.
FedEx missed earnings expectations. Among other things, they blamed tariffs and noted a global slowdown outside the U.S. To me, it sounds like a bunch of excuses. The trend to online retail has been at neck-braking speed. So package delivery demand should be rising. Since October, oil has fallen 35%. This is a major line item on the FedEx P&L so it should have improved their margins.
In 2018, when Wall Street is obsessed with forward guidance, FedEx not only committed the cardinal sin of lowering it, it announced major cost reduction measures in discretionary spending and major labor overhead.
This sounds more like an emergency plan for a company in trouble. So as much as I would like to bet on FedEx stock, I’m afraid of their level of worry. The macro-economy is not as bad as their reaction indicates that it is. So I assume that there is a level of panic inside FedEx.
Should You Buy FedEx Stock Now?
Even though FedEx stocks sells at only a 10x trailing P/E ratio, I conclude that it can get a lot cheaper. The Eurozone slowdown is not likely to get better since the ECB just announced the end of the bond-buying program. So management’s concerns are likely to get worse.
The good news is that Fedex is acting to fix the problems. At face value this scares investors out of the stock. But they are trying to set up for better results next year and for the long term. The company will be better for it. The retail sector failed to do this when they faced Amazon early and they paid the price. FDX management is acting here so that they control their own destiny in the long run.
Clearly this is not an obvious entry point into the stock. The short-term bounce will be difficult, especially when the S&P 500 can’t even hold a rally for longer than a few hours.
Depending on how general markets react to Fed actions this week, it could be a decent place to start or add to longs in FedEx stock as a long-term investment. But first, I’d wait for a couple more days of heavy selling. It is too hazardous a knife to catch on the first day dip.
I also need to see the transport sector snap out of its downward spiral. the iShares Transportation Average ETF (NYSEARCA:IYT) is already in bear territory, down 20% from recent highs.
The Bottom Line on FedEx Stock
Wall Street experts still are too optimistic about FedEx stock. This earnings report raises the odds of some downgrades in ratings. Too many of them still have it as a buy. And FDX is trading far below their price ranges so something has to change. JP Morgan (NYSE:JPM) started this ball rolling already this morning with a price target cut to $230.
Caution is warranted as the sell-the-dip meme is currently rampant. Rallies have no follow through and that puts the sellers in control. While the macro-economy is still healthy, the sentiment is very sour. And FedEx stock will need the help of the general markets to shrug this dip.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
