Over the years, companies like FedEx (NYSE:FDX) and Walmart (NYSE:WMT) have been real indicators of economic activity. As trade tensions persist, the global economy is feeling the heat and so is FedEx stock.
As the company reported first-quarter results for 2020, FedEx stock slumped by 13%. The sharp downside was on the back of FedEx missing 1Q20 estimates and lowering EPS guidance for fiscal 2020.
This coverage will discuss some of the near-term concerns for FedEx and the opportunities beyond the current economic headwinds. Overall, I am of the opinion that FDX stock will be an interesting buy in the range of $130 to $140.
Before talking about the fundamental factors, I want to mention here that between December 2018 and August 2019, FedEx stock touched levels of $149 to $152 three times. Each time, the stock bounced back to higher levels.
The FedEx stock price is again below $150 on high volumes and it’s likely that the strong technical support is broken. Therefore, it would not be surprising to see the stock decline by another 10% to 15% from current levels before any consolidation and upside.
FedEx Stock Highlights Economic Concerns
Economic worries are the key reason to maintain a bearish view on FedEx stock. The company, in its 1Q20 presentation, highlighted the fact that the U.S. and Euro zone manufacturing sector are already in recession.
Further, FedEx made it clear that the trade war is largely to be blamed for the slowdown. With the trade war persisting, it seems unlikely that global trade volumes will trend higher. Therefore, results in the coming quarters will remain muted.
It is also important to mention that the Federal Reserve is continuing to pursue expansionary monetary policy. The central bank lowered target rates by 25 basis points yesterday. While it does add to liquidity, it is an indicator of the seriousness of the current downturn.
Weak economic activity directly impacts FDX stock and it is not surprising that the company has revised 2020 earnings estimate to $11 to $13 per share.
A potential reversal in sentiment could come in October when the U.S. and China meet again for trade talks. I do expect gradual resolution as both economic powers are impacted by the trade war.
FDX Stock Is Attractive for Long-Term
I believe that investors need to look beyond the current economic headwinds and consider exposure to FDX stock on any correction.
At the mid-range of 2020 earnings estimate, FedEx stock is trading at a PE of 12.5. United Parcel Service (NYSE:UPS) is currently trading at $121 and has a full year EPS guidance (mid-range) of about $7.6. Therefore, United Parcel Service trades at a PE of about 15.
Clearly, FedEx stock seems attractive at current levels. I do expect the stock to decline further from a technical perspective. In a forward PE range of 10-12, FedEx stock is worth considering.
Coming to the fundamental positives, I expect the following factors to be medium- to long-term upside triggers.
First, the integration of Europe’s TNT Express will be completed by fiscal year 2020-21 along with the company’s fleet modernization. Both these factors will have a positive impact on the company’s EBITDA margin.
Second, FedEx has significant growth potential in the U.S. e-commerce segment, which is likely to grow at a robust pace. In addition, TNT has a quality road network in Europe with FedEx having the largest air network in the world. The combination is likely to make significant inroads in the European markets. FedEx has also been expanding on B2B e-commerce which has provided an additional market.
Final Thoughts on FedEx Stock
There is no doubt that FedEx stock is a fundamentally strong stock and the company has a robust infrastructure network. Further, the acquisition of TNT will deliver value beyond 2021 and I expect the company’s EBITDA margin to improve with fleet modernization.
From a risk perspective, geo-political tensions can translate into higher oil prices and that can potentially impact the margins. While geo-political tensions remain high, weak economic growth implies that oil does not go ballistic.
Overall, in the near-term, economic headwinds will dominate the stock trend. I expect FedEx stock to move lower in the range of $130 to $140 before any upside. Therefore, I would recommend that investors stay on the sidelines.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
