Skip to main content
  • FedEx revenue and sales are slipping.
  • The risk of recession prompted management to issue a downbeat outlook.
  • The company's shares may remain rangebound.

It’s been a tough slog for transportation stocks like FedEx  (FDX)  this year. Supply chain disruptions contributed to negative gross domestic product in the first two quarters, and soaring fuel and labor costs have proven a stiff headwind to industry margins. Despite GDP swinging positive in the third quarter, FedEx revenue and earnings slipped in the three months ending November 30th, raising the question, “Is FedEx stock a buy ahead of 2023?”

Results remain disappointing

FedEx’s sales slid 3% year-over-year to $22.8 billion last quarter, and although the company took an axe to its costs, operating income fell by 26% to $1.2 billion. Real Money’s Stephen Guilfoyle weighed in on FedEx’s performance yesterday, writing:

“Operating expenses were reduced to $21.638B from $21.877B as reduced salaries costs related to purchased transportation more than offset increased fuel expenses. This left operating margin at 5.2% versus 6.8% a year ago.”

It’s discouraging that FedEx’s sales declined despite GDP growth of 3.2% in the third quarter and an estimated 2.7% in the fourth quarter. More discouraging, however, is that lower margins on less revenue caused diluted GAAP-accounting earnings per share to fall 21% to $3.07 from $3.88 a year ago. That drop is despite an accelerated share repurchase plan that boosted per-share earnings by $0.06.

Investors could argue declining sales and profit are temporary if not for poor guidance for next year. FedEx is modeling for adjusted, non-GAAP accounting EPS of $13 to $14 in fiscal 2023, far below the $18.17 reported in 2021 and the $20.61 delivered in 2022.

Guilfoyle writes:

“The firm is moving the ball in the right direction on cost-cutting. That said, the firm itself continues to see a light-volume environment ahead. While the improvements made are welcome and the balance sheet is not really bad, there is a likely economic contraction on the horizon.”

The likelihood of a recession next year has increased, given Treasury bond yields.

Typically, yields on bonds with longer-term maturities are higher than on shorter-term bonds to compensate for lending the money for a longer period. When the opposite happens, like now, it’s historically a harbinger of recession. Currently, the 3-month Treasury bill yields over 4.3%, while the 10-year Treasury note yields below 3.7%. The last time those yields were this inverted was November 2020, during the Internet bust.

If inverted bond yields are correctly forecasting a recession next year, it’s unlikely that FedEx’s cost-cutting will offset the impact of declining shipping revenue. We already saw that last quarter within FedEx's Express business, which accounts for almost half of sales. During the company's conference call, management said the segment's "Adjusted operating income declined 65% due to lower volumes as cost reductions lagged accelerating volume declines."

The risk that cost cuts won't be enough to overcome declining volume prompted Guilfoyle to write, "While reducing expenses will support margin, I am not really sure that I want to be in delivery services as the economy contracts in size.”

A range-bound stock price

After reaching a low of $142 in September, FedEx’s share price has rebounded nicely. However, a closer look at its chart shows that little progress has been made since mid-November. Instead, shares have traded mostly sideways between $160 to $180.

CHART-Street-Smarts-JS-122222

Earlier this week, Real Money’s technical expert, Bruce Kamich, charted FedEx ahead of earnings. 

After considering its daily and weekly price chart, on-balance volume, a running total of up minus down day volume, and moving average convergence divergence, a momentum indicator, he concluded, “The charts and indicators look bearish, and traders should avoid the long side of FDX for now.”

Following FedEx’s earnings results, shares have ticked higher, recapturing 50-day moving average support. However, there’s still lots of work to make the technical setup look encouraging. At $174, shares remain within the price band they’ve been in since November 11, and Guilfoyle notes that rallies this quarter haven’t been able to move up through critical resistance. He writes:

“Readers will see that FDX created a still unfilled gap back in early September and that every attempt to fill that gap since has met with resistance at the 38.2% Fibonacci retracement level of the June through September selloff…My feeling is that a trading range is likely created/extended. Support above $160. Resistance above $180.”

Is FedEx a buy?

If Guilfoyle’s correct that we could remain rangebound, the fact that we’re much closer to $180 than $160 isn’t bullish for risk-to-reward. Stocks often fill gaps, so if we move above $180, an argument for a move to $200 to fill September’s gap is possible. Unfortunately, that’s about where the 200-day moving average resistance sits too.

Kamich’s pre-EPS review of FedEx laid out a point-and-figure chart target of $151, so investors could expand the potential range from $151 to $200, putting shares currently right about in the middle on risk-to-reward – hardly a slamdunk reason to buy.

It also doesn’t help that shares aren’t arguably all that cheap. Shares are trading about 12.7 times Wall Street’s fiscal 2023 earnings estimates of $13.70. The 5-year P/E range for the stock is 7 to 26. 

Valuation looks better on fiscal 2024 estimates for EPS of $17.08, but the forward P/E is still above 10. Since recession could mean that those fiscal 2024 estimates get revised lower, I’m not sure that’s enough of a discount to warrant buying shares yet.

Back to Guilfoyle:

“If I do venture into delivery services, it would probably be into the shares of United Parcel Service  (UPS)  where there is a track record of excellence and the CEO... Carol Tome, who has a track record all her own. Tome had guided Home Depot (HD) out of the "Great Financial Crisis" as that firm's CFO.”

The Smart Play

Guilfoyle prefers UPS over FedEx. He’s not alone. Action Alerts PLUS’ Co-Portfolio Managers Bob Lang and Chris Versace own UPS in AAP’s portfolio. After FedEx reported its quarterly results, Lang wrote:

“Operationally, I don't think their [FedEx] business is growing right now. And I think we're probably going to see FedEx here stay in this price range, valuation range, for quite some time until the economy starts to pick up and gain some momentum. And we don't-- again, if we do head into recession, this is a company that's going to get hit rather hard.

So as it relates to UPS-- and we often see that UPS does a lot better than FedEx when it comes out with their numbers and comes out with their metrics. So they will come out and come out and report their earnings later in January. I've been-- as an anecdote, JD, I've been seeing a lot more Brown trucks than I am seeing FedEx trucks out there on deliveries down the street. So you know, again, that's just one person giving an observation over here, but still, it may mean something down the road for UPS.”

Eventually, cost-cutting will set FedEx up for year-over-year profit growth once the economy finds its footing. But, unfortunately, it’s hard to determine when a recession may happen, how bad it may be, or how long it will last. For this reason, it could be better to trade or avoid FedEx stock until we have better insight into when revenue and profit will improve again.

Tags
terms:
THUMB Doug Kass Stocks 012523

Doug Kass’s Latest Thoughts on Stocks

Hedge fund manager Doug Kass thinks it could be tough sledding for stocks in the short term.

THUMB-Key-Stocks-JS-012423

Q4 Earnings Reports Are Key To What’s Next for Stocks

How stocks react to fourth-quarter earnings will be critical to determining if the recent stock market rally continues.

Chart (2)

How To Profit from Progressive Exposure

In a bear market, probing trades and progressive exposure can limit risk while still allowing you to profit from the next bull market.

Doug Kass’s Latest Thoughts on Stocks

Doug Kass’s Latest Thoughts on Stocks

Hedge fund manager Doug Kass thinks it could be tough sledding for stocks in the short term.

THUMB-Key-Stocks-JS-012423

Q4 Earnings Reports Are Key To What’s Next for Stocks

How stocks react to fourth-quarter earnings will be critical to determining if the recent stock market rally continues.

Chart (2)

How To Profit from Progressive Exposure

In a bear market, probing trades and progressive exposure can limit risk while still allowing you to profit from the next bull market.

Cooperman JS 012023

Leon Cooperman: Stocks Are Best In A Bad Neighborhood

Cooperman is bullish on individual stocks, but bearish on the overall market.