FedEx Grounded: Is It Time to Send the Stock Packing?
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Nothing good ever happens when investors establish an uncompromising conviction about what they think a company can do. You set yourself up for disappointment. Because the only guarantee on Wall Street is that market leaders don’t hold that title infinitely. The recent concerns surround shipping giant FedEX (NYSE: FDX) on the heels of its first-quarter earnings report serves as a perfect example.
Delivery in the quarter was mixed
The company’s performance in its most recent quarter was “mixed.” FedEx did log a beat by reporting net income of $459 million or $1.45 per share – topping analysts’ estimates of $1.40. However, that was the extent of the good news. What followed was one disappointment after the next. Not only did its Express segment show considerable signs of weakness, but FedEx did very little to assure investors that things would get better.
What’s more, operating margins in its Express segment declined to just over 3%, while its operating income plummeted by 28%. Understandably, there were challenges overseas. However, it was exceptionally disappointing that FedEx's U.S. domestic package volumes showed such a drastic drop in volume. Times are tough for many companies that rely on shipments and logistics.
Understandably, tough economic times have forced many such companies to opt out of faster and more expensive shipment options. However, it seems it was too much for FedEx to overcome. With their being no signs pointing an imminent recovery, FedEx opted to slash its earnings outlook for the full fiscal year.
The company says earnings will arrive in the range of $6.20 to $6.60 per share for full-year 2013. It felt it had no choice. Considering its top range once approached $7.40, it’s a pretty significant downward revision. For next quarter it expects net income to arrive in the range of $1.30 to $1.45 per share – down from the $1.57 it reported in the same quarter of a year ago.
The report was anything but impressive and the company has much to prove. That its Express segment, its largest division in terms of revenue significantly underperformed should be a concern for investors. Though it did warn investors of potential struggles in advance of the announcement, it seems though; it still underestimated the magnitude and failed to make the necessary adjustments.
However, the company appears committed on a restructuring plan and shift in strategy - one where management is looking for ways to reduce costs while improving asset consumption. There just aren’t many companies that are as efficient in terms of logistics as FedEx. But if the stock is going to work for the long term, in addition to its assets it must also address its capital leverage.
The company has not shown that it can generate the sort of free cash flow needed to make the stock attractive – particularly in periods of weakness where revenue streams relies on global transportation. But the opportunity for growth is certainly there. It just needs to execute. So although the results of the quarter were disappointing, it just might prove to be the wakeup call that FedEx needed.
At current levels, though its return on capital is not particularly attractive, the stock has a considerable amount of value. What’s more, I think investors should consider it encouraging that the company’s management understands what possibly lies ahead and has laid the groundwork for a recovery. Buying the stock here equates to making a bet that there might be a swift recovery in the global economy. At $90 per share with bad news already baked in suggesting minimal downside risk, I think this is a good bet to make.
rsaintvilus has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.