Don’t Chase FedEx Higher, Wait For The Pullback

Key Points

• FedEx shares are surging on better-than-expected earnings but don't chase the price. 
• Analysts are upping their targets, but consensus has this stock fairly valued. 
• Resistance may cap gains until later in the year when some expected catalysts emerge. 

FedEx NYSE: FDX shares are rocketing higher on an improved earnings outlook but don’t take this as good news for the broad economy. The gains are impressive but driven by higher prices and company efforts that could only partially offset a decline in volume. The takeaway is that FDX shares could continue higher the upside potential is limited. The premarket action has the stock just below a critical resistance point, which may keep this market moving sideways until later this year. 

“Third quarter results were negatively affected by continued demand weakness, particularly at FedEx Express. In addition, operating income was negatively affected by the effects of global inflation, partially offset by U.S. domestic yield improvement and cost-reduction actions,” said FedEX CEO Raj Subramaniam. 

FedEx Was A Buy; Now It’s Wait And See 

FedEx was a buy going into earnings due to a low bar set by the analysts and outperformance foreshadowed by UPS NYSE: UPS. That is questionable now, given the company’s mixed results. The revenue fell -5.9% YOY and missed the consensus by 230 basis points which is not good news. The offsetting factor is traction gained from cost-cutting efforts and the solid beat on the bottom line that overshadows the top-line miss. 

The caveat is that these are FedEx-specific results, possibly indicating better-than-expected results from the broader shipping/freight industry, but not a sign of economic strength. The company’s results are primarily driven by pricing increases of 11% in the Ground and Freight segments and 3% in Express. Volume is down in all segments and not forecast to improve. 

The company’s margin is excellent news, but the news is mixed. FedEx produced a margin to exceed the analyst's high-end targets, but the margin still contracted compared to last year. The Q3 adjusted EPS came in at $3.41 or $0.67 better than expected but is down more than 25% YOY due to deleveraging and top-line weakness.

Guidance for the year is favorable; the new low-end EPS is well above the previous high-end and has the analysts raising their targets but down more than 30% at the high end. The takeaway is that these are promising results; they are better-than-expected results, but they are not fantastic enough to sustain a rally and produce a new all-time high. 

Analysts Activity Drives Supports FedEx 

The analysts' activity supports FedEx and may drive it higher, but the upside is limited. The Q3 results and guidance sparked at least 10 new price targets that see this stock trading near $260, above the consensus, but there is significant resistance above the current price action, which is in line with the consensus. In this light, FedEx shares may struggle to move higher without some other catalyst to drive them. And upcoming catalysts could move the stock but not until later in the year. 

"Beyond the beat and F4Q raise, we think the potential earnings upside in F24 is quite large, as FedEx posted solidly better... With upcoming catalysts coming from DRIVE day on April 5th and a relatively low F4Q hurdle, we would expect strong upside follow through from FedEx shares," said Citi analyst Chris Wetherbee when he reiterated a Buy rating and raised the price target to $275 per share from $250.

The Technical Outlook: FedEx Hits A Ceiling 

FDX shares popped on the guidance raise, but the market has already hit the ceiling and is below a critical resistance point. This may keep the market moving sideways in the near to short term, and there is a possibility shares will pull back before they move higher. The 10% surge in share price opened a large window on the daily chart the market may close while it digests this news and waits for the next catalysts.