One look at FedEx Corporation’s (NYSE: FDX) chart shows that it has been a rough year. With the shipping and logistics leader’s stock down more than 40% since January 1st, investors are left to wonder if things will get better.
Yes and no.
In the near term, FedEx will continue to struggle with the challenges that have caused ‘return to sender,’ or in this case, ‘return to early pandemic levels,’ to be stamped on its shares.
Longer term, the company will recover. With recession worries mounting, just how much longer is hard to say. What we do know though is that FedEx has faced similar rough patches before only to climb to fresh record highs.
Why is FedEx Stock Falling?
Last month, FedEx provided some early Halloween fright when it warned that current quarter earnings would be weak. This came after it posted a 21% EPS decline for its latest quarter that reflected a slowdown in delivery volumes and an increase in fuel and wage expenses.
Management noted that global volumes were soft last quarter and that things got progressively worse as the period wore on. FedEx Express, the company’s biggest segment, recorded an 11% volume slump largely due to weakness in Asia and Europe. FedEx Ground revenue fell short of internal expectations by $300 million. Add in an expectation that things could further deteriorate in the current quarter and FedEx shareholders rushed to the exits.
How Will FedEx Perform in 2023?
Since FedEx has an unusual fiscal calendar, we have to look forward to the company’s fiscal 2024 to get a glimpse of what’s coming in calendar 2023. The Street is expecting that FedEx will get off to a good start in its new fiscal year. Compared to last quarter’s dud, the consensus forecast for Q1 EPS implies 25% year-over-year growth.
This means that we may have to endure a few more ugly quarters before the market regains confidence in FedEx. While ‘less negative’ earnings declines in coming periods may attract buyers, more than likely a return to growth mode will be necessary for the FedEx bleeding to stop.
For all of fiscal 2024, the consensus EPS forecast sits at around $18. Although well below last year’s bottom line, this equates to 25% full-year growth. Of course, this estimate is subject to significant change, but it could set the stage for a return to the excellent EPS figures that FedEx flashed during the pandemic e-commerce boom.
How will it get there? By next fall, interest rate hikes will probably be over and we may even see rate decreases. If the Fed has its way, inflation will be significantly lower by then and consumer purchasing power will be enhanced. This means that FedEx should benefit from improved e-commerce activity and business confidence that together will boost shipping volumes. And since FedEx is implementing rate hikes of its own as of January 2nd, top line performances should improve alongside the economy.
The outlook for the expense side of the ledger is murkier. That’s because volatile oil prices are hard to predict. Lately, recession worries and the strong dollar have prompted a crude selloff. But with the Russian-Ukraine war ongoing and other geopolitical risks swirling, the extent to which fuel expenses eat into FedEx profits is a wildcard. So too is the potential for wage pressures.
Having less frequent flights, closing select sort facilities, and cutting back on Sunday deliveries are additional measures the FedEx has discussed to improve profitability. It's uncertain which levers will be pulled, but it is comforting to know that some things remain in the company’s control.
What is FedEx’s Long-Term Growth Strategy?
To be bullish about FedEx shares at this juncture, you have to still believe in the new management team’s five-year plan. In the Q1 call, CEO Raj Subramaniam expressed confidence that the company’s 2025 financial targets are still in reach. These include:
- annual revenue growth of 4% to 6%
- a 10% operating margin led by 20%-plus margins at FedEx Freight and
- annual EPS growth of 14% to 19%.
It is optimism that the Street is taking with a grain of salt. That’s because prior to the recent earnings warning, FedEx management gave a bright outlook that quickly proved to be unfounded.
As it tries to get back on course, FedEx will try to win over investors by taking a more shareholder-friendly stance. With a nudge from an activist investor, the company has been aggressively raising its dividend and buyback program. Following a 53% dividend increase, FedEx shares currently offer a yield north of 3%.
Banking the dividend payments and waiting for things to turn around may not be a bad move here, but it’ll require patience. The good news is the downside appears limited and, whereas many industrials are saddled with high debt, FedEx’s balance sheet strength will be a big factor in its eventual recovery.
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