Yahoo Finance FedEx Corporation (FDX) Stock Bulls Push Higher, Ignoring Trouble Warnings
FedEx Corporation (NYSE:FDX) continues to trade, edging to an all-time high on September 29 based on the earnings report delivered September 20. FDX stock has maintained near record levels despite abundant signs of trouble ahead.
Earnings for the quarter ending in August were down sharply, to $596 million or $2.19 per share, on revenue of $15.3 billion. This compared to net income of $1.02 billion, $3.76 per share, on revenues of $15.7 billion the previous quarter.
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Management blamed this mainly on a cyberattack — the NotPetya virus — infecting operations of its TNT Express unit in Ukraine in June. The company estimates the cost of the hack at $300 million.
FedEx also reduced its earnings guidance range for the year, from $13.20-$14 per share to $12-$12.80. Customers are not nearly as forgiving of cyberattacks as they were, and TNT faces an uphill battle winning back market share.
Why Not Buy UPS?
True fans of FedEx would never consider the alternative, United Parcel Service, Inc. (NYSE:UPS), which is up only 9.8% over the last year while FDX is up almost 30%.
There are reasons for this. If you take out the cyberattack, FedEx’s quarter was in-line with previous estimates. At current levels, the price to earnings multiple for FDX is half of that for UPS, as InvestorPlace’s Nicholas Chahine notes, and the average analyst price target is $237, just a hair more than 5% above where it opens this week.
In addition to the virus, FedEx was also hit last quarter by Hurricane Harvey, but analysts insist that its mix of ground, express, and freight services should be delivering big earnings gains by early next year.
But there are other, fundamental reasons for concern.
Amazon Arbitrage
The most important danger signal is coming from Amazon.Com, Inc. (NASDAQ:AMZN), which continues to arbitrage FedEx, UPS, and the U.S. Postal Service for deliveries, along with its own growing infrastructure.
FedEx’ retail presence is in the network of former Kinko’s copy stores, large and performing poorly on a per square foot basis as the Internet cuts printing demand. UPS Stores, a franchise formerly called Mailboxes Etc., are much smaller, delivering more sales per square foot through mailbox rentals and notary services. UPS also takes Amazon returns, and it has a reputation for lower prices on ground shipments.
Amazon’s purchase of Whole Foods, and its deal with Kohl’s Corporation (NYSE:KSS), also represent pick-up points on both deliveries and returns, allowing it to do more arbitrage among its carrier options. This pressure is only going to grow with time, as more Amazon customers are going to be doing their own pick-up and delivery as its retail footprint increases, while most will no longer need long-distance services.
FedEx founder and CEO Fred Smith continues to dismiss the threat of Amazon to his company, saying that its disruption is not as bad as analysts think. Smith is 73; Some younger colleagues might want to take another look.
Trouble Ahead for FDX Stock
Facing a margin squeeze, FedEx is already planning on raising rates at the start of the year, which will include new charges on large packages and those that require special handling.
UBS recently downgraded the stock to neutral from buy, citing the lingering impacts of the TNT cyber hack, and questioning how much the company can cut costs.
That seems fair to me. My guess is that FDX is going to disappoint new investors until it gets past the impact of the cyberattack and proves it can push through its price hikes. Analysts are going to readjust to Amazon as well, and that is going to hurt FDX shares.
Balancing risks and rewards, I think FedEx is fairly-priced at current levels. It may not fall far, but unless the whole market goes into a speculative frenzy I don’t think it is going to rise fast, either.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
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