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FedEx (FDX) Hits 52-Week Low: Does it Still Hold Promise?

Zacks

Shares of FedEx Corporation FDX have been on the red territory for a while now, with its shares declining around 20% in a year’s time.

 

 

In fact, the stock has declined more than 12% in the past month itself. The company’s share price hit a 52-week low of $188.51 during the trading session on Dec 10, before retracing to close at $192.93, reflecting a 4.2% decline from Dec 9’s closing price. While factors like high operating expenses and debts are weighing on the stock, we believe that the Memphis, TN- based transportation company still holds much promise as is validated by its VGM Score of B.

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What’s Hurting FedEx’s Performance?

We expect high costs to limit the company's bottom-line growth in second-quarter fiscal 2019 as has been the case over the past few quarters. Detailed results should be out on Dec 18. With FedEx investing significantly to upgrade facilities at its key divisions, capital expenses are on an upswing. For fiscal 2019, capital expenses are expected to be $5.6 billion. Additionally, integration expenses pertaining to TNT Express are pushing up costs. Such expenses are expected to be $459 million in the fiscal year.

Currently, FedEx is leaving no stone unturned to meet the surge in demand during this year's holiday season as a below-par performance in the period will hurt the stock significantly. However, the high delivery costs might be detrimental to its bottom-line growth. Notably, the bonuses paid to pilots for keeping flights operational during the upcoming peak holiday shipping season are also escalating costs.

Moreover, recommendations from a task force appointed by President Trump suggested that the United States Postal Service (“USPS”) should raise the price for shipping packages. The move might hurt online retailers like Amazon.com AMZN and eBay EBAY significantly. It may also hit the likes of FedEx apart from rival United Parcel Service UPS as these companies often use USPS for the last mile delivery.

With Amazon looking to expand its logistics network, competition is likely to intensify for FedEx. In 2017, FedEx's operations have been hurt by cyber-attacks. Re-occurrence of such events will hurt the stock. High debt levels and trade-war related fears are added concerns.

Will the Stock Bounce Back?

FedEx is being aided by e-commerce growth and a buoyant U.S. economy. In a bid to meet the anticipated surge in package volume during the holiday season, the company stated that it is boosting U.S. delivery by expanding ground operations to six days per week throughout the year.

The current tax law, which reduces corporate tax rate significantly, is an added positive for FedEx. In fiscal 2018, the company received a benefit of $1.6 billion from the new tax law. The tax law was primarily responsible for the company's decision to raise its earnings guidance for fiscal 2019. It now anticipates the same in the range of $17.20-$17.80, excluding pension adjustments and TNT Express integration expenses. Prior view was in the band of $17-$17.60.

FedEx’s efforts to reward its shareholders through dividend payments and share buybacks also bode well. Moreover, the company’s earnings are estimated to witness long-term growth of 12.8%, higher than the comparable figure of 11% for its industry.

Despite the above-mentioned headwinds, an earnings beat may not be too difficult for FedEx in the in the second quarter of fiscal 2019. This is because of the conservative nature of the Zacks Consensus Estimate for earnings, which has been revised downward to the tune of 1.2% over the past 90 days.

Moreover, it is a known fact that a solid earnings performance more often than not boosts investor confidence in the stock, translating into rapid price appreciation. Therefore, shares of FedEx are likely to get pricey in the event of the company performing well on Dec 18. Considering this and the company’s solid fundamentals, as highlighted above, the current price seems a good entry point for investors. The Zacks Rank #2 (Buy) carried by FedEx seems to suggest the same. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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