FedEx Fails To Deliver (NYSE: FDX)

After reporting an ugly miss for their Q2 earnings, shares of FedEx (NYSE: FDX) were taking damage in after-hours trading last night. With Wall Street taking them down almost 7% after Tuesday’s session, investors will be worried going into Wednesday. It’s been a tough 2019 for them and any hopes of recovering the damage wrought in 2018 are surely dashed.

The company’s EPS missed analyst expectations by a full $0.27 while their revenue also came in below consensus and was poor enough to register negative growth when compared to the same period last year. The ugliest metric by far was the company’s operating margin which was slashed more than 50%. It was the second quarter in a row that missed expectations. Even though management had lowered forward guidance in September’s release, for the third time this year, it still doesn’t look like it set the right expectations.

As investors digested the report, fingers were pointed at much the same culprits; a slowdown in global trade and Amazon (NASDAQ: AMZN).

Struggles With Amazon

The former has certainly been a deadweight to many freight and logistics companies as the US-China trade war has ebbed and flowed. It’s hard for companies to constantly adjust their forecasts based on tweets and headlines but such is the world we live in right now. The latter has been specific to FedEx and will have many remaining bulls feeling nervous.

Earlier this year, one of the biggest names in e-commerce and one of the biggest names in delivery services parted ways as Amazon shifted from being a FedEx customer to a FedEx competitor (and it’s not the first time this year that Amazon has split from another big name). To reduce its shipping costs, Amazon has been becoming its own delivery service in recent years. Morgan Stanley reported early this month that Amazon is already delivering over half of its own packages in the U.S. The decision to part with Amazon reportedly cost FedEx upwards of $900 million in revenue. It’s no surprise that these kinds of moves towards self-sufficiency have left traditional deliverers like FedEx and its top competitors' UPS (NYSE: UPS) and USPS scrambling to make up for lost business.

Based on yesterday’s numbers, it appears that at least one of that list isn’t doing a very good job and it doesn’t look like the pain is going to stop anytime soon. On Monday it was reported that Amazon was blocking its third-party sellers from using FedEx’s ground delivery service, citing concerns about the company’s ability to perform. As we noted last week, Amazon is America’s biggest retailer. This fresh vote of no confidence from them will do little to inspire FedEx bulls.

They’ve been putting in a tough shift since early 2018 when the stock turned back from all-time highs and began its 40% march lower to where it is now.

Until the trade war comes to a close or until global trade picks back up, it’s hard to see the long case for FedEx stock right now. Deutsche Bank, Stifel, BMO Capital, and Morgan Stanley were all out slashing pricing targets after September’s miss and investors will be watching closely to see if the sharks are circling again this time. Closer to home, FedEx’s own management lowered forward guidance for the fourth time this year last night.

Technical Analysis

Technical traders will see the consistent lower highs and the structured downtrend and there’s not much by way of support until we drop another 20% to the $127 level. On top of this, the 50-day moving average is well below the 200 day moving average - always an ugly sign.

Despite all this, management is positive about the company’s ability to bounce back and if they can set expectations accordingly, there’s always the chance that they’ll surprise investors. The first target they’re sure to have is recovering the lost operating margin. Their CEO, Frederick Smith, spoke to this specifically last night when he said: “While we have experienced some higher-than-expected expenses this quarter, we forecast FedEx Ground operating margins to rebound to the teens in our fiscal fourth quarter as the bow wave of costs for these changes is absorbed.”

Let’s wait and see if they can deliver this.