One Look at FedEx Corporation’s (NYSE: FDX) chart shows it’s been a tough year. With the shipping and logistics leader’s stock down more than 40% since Jan. 1, investors are left wondering if things will get better.
Yes and no.
In the near term, FedEx will continue to grapple with the challenges that have left “back to sender,” or in this case “return to early pandemic levels,” stamped on its stock.
In the longer term, the company will recover. Of recession worries pile up, how much longer is hard to say. What we do know, however, is that FedEx has faced similar difficult moments before, only to climb to new record highs.
Why is FedEx Shares Falling?
Last month, FedEx sparked some early Halloween scares when it warned that current quarterly results would be weak. This came after it posted a 21% EPS decline for the last quarter due to a slowdown in delivery volumes and an increase in fuel and labor costs.
Management noted that global volumes were weak in the past quarter and that the situation continued to deteriorate as the period progressed. FedEx Express, the company’s largest segment, recorded an 11% volume decline, largely due to weakness in Asia and Europe. FedEx Ground revenue fell below internal expectations by $300 million. Add to that the expectation that things could deteriorate further in the current quarter and FedEx shareholders rushed for the exits.
How will FedEx perform in 2023?
Since FedEx has an unusual fiscal calendar, we have to look to the company’s fiscal year 2024 to get a glimpse of what’s coming up in calendar 2023. The Street expects FedEx to get off to a good start in the new fiscal year. Compared to last quarter’s dud, the consensus forecast for EPS for the first quarter implies 25% year-over-year growth.
This means we may have to endure a few more ugly quarters before the market regains confidence in FedEx. While ‘less negative’ earnings declines may attract buyers in the coming period, it will most likely require a return to growth mode to stop the FedEx bleeding.
For the full fiscal year 2024, the consensus EPS forecast is around $18. While this is well below last year’s result, it represents 25% full-year growth. Of course, this estimate is subject to significant changes, but it could pave the way for a return to the excellent EPS numbers that FedEx flashed during the pandemic e-commerce boom.
How will it get there? By next fall, the rate hikes are likely to be over and we may even see rate cuts. If the Fed has its way, inflation will be significantly lower by then and consumer purchasing power will increase. This means FedEx should benefit from improved e-commerce activity and business confidence, which together will drive shipping volumes. And since FedEx itself will pass rate hikes from Jan. 2, peak performance should improve along with the economy.
The outlook for the cost side of the ledger is murkier. That’s because volatile oil prices are hard to predict. Lately, concerns about the recession and the strong dollar have led to a rough sale. But with the Russo-Ukraine war on and other geopolitical risks swirling, the extent to which fuel costs are at the expense of FedEx profits is a wild card. This also applies to the potential for wage pressures.
Less frequent flights, closing of select sorting facilities and curbing Sunday deliveries are additional measures FedEx has discussed to improve profitability. It’s uncertain what levers will be pulled, but it’s reassuring to know that some things remain in the hands of the company.
What is FedEx’s Long-Term Growth Strategy?
To be optimistic about FedEx stocks right now, you still have to believe in the ideas of the new management team five year plan. In the Q1 call, CEO Raj Subramaniam expressed confidence that the company’s 2025 financial targets are still within reach. Among which:
- annual revenue growth of 4% to 6%
- operating margin of 10% led by 20% plus margins at FedEx Freight and
- annual EPS growth from 14% to 19%.
It is optimism that the Strait takes with a grain of salt. That’s because prior to the recent profit warning, FedEx management gave a rosy outlook that quickly turned out to be unfounded.
While trying to get back on track, FedEx will try to: win over investors by adopting a more shareholder-friendly attitude. With a nudge from an activist investor, the company has aggressively increased its dividend and buyback program. Following a 53% dividend hike, FedEx stocks currently offer returns of over 3%.
Collecting the dividend payments and waiting for things to turn around may not be a bad move here, but it does require patience. The good news is that the downside appears to be limited and, while much industry and services will be saddled with high debt, the strength of FedEx’s balance sheet will be a big factor in the eventual recovery.
FedEx is part of the ukbusinessupdates.com Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.