FedEx Earnings Beat Wall Street Estimates But Weak Ground Margins Hurt Shares

FedEx, the world’s leading express delivery company, reported better-than-expected earnings in the second quarter of the fiscal year 2021, but the Memphis-based delivery services company’s ground margins were less impressive than the previous quarter, sending its shares down about 4% in extended trading on Thursday.

The U.S. delivery firm said its fiscal second quarter ended November 30 adjusted net income rose to $1.30 billion, or $4.83 per share, from $660 million, or $2.51 per share from the same period a year ago. That was better than the Wall Street consensus estimate of $$3.93 per shares. The company’s revenue jumped 19% to $20.6 billion, again beating analysts’ expectations of $19.5 billion.

However, ground results were much lower-than-anticipated. Although margin improved 110 basis points y/y to 7.5%, it was the third-lowest ever, following the troughs of fiscal second quarter and third quarter of 2020.

Following this, FedEx’s shares declined about 4% to $281.75 in extended trading on Thursday after closing 1.19% higher at $292.26. The U.S. delivery firm’s stock has almost doubled – rising around 95% – so far this year.

“Ground’s margin fell short of our expectations and probably consensus. We think that’s partly because of unusually high “peak prep” costs (including pulling forward payments to ISP-drivers and significant sorting-headcount additions), along with pandemic related inefficiencies. We think the shares could see some selling pressure at market open on December 18 due to Ground’s margin performance,  which wasn’t bad but likely didn’t demonstrate the incremental operating leverage from volume growth that investors were looking for following the impressive fiscal first-quarter showing,” noted Matthew Young, equity analyst at Morningstar.

“We don’t expect to materially alter our $210 fair value, save for a potential slight increase from the time value of money and raising our top-line forecast, partly offset by lowering our near-term Ground EBIT-margin estimates. Following a surge in recent months, the shares are moderately overvalued. FedEx should continue to generate greater returns on its substantial network investment, but we think investor expectations have effectively set the bar a bit high in terms of long-term free cash flow growth,” Young added.

FedEx Stock Price Forecast

Eleven equity analysts forecast the average price in 12 months at $338.73 with a high forecast of $380.00 and a low forecast of $281.00. The average price target represents a 15.90% increase from the last price of $292.26. All those 11 analysts rated “Buy”, according to Tipranks.

Morgan Stanley gave the base target price of $250 with a high of $400 under a bull-case scenario and $100 under the worst-case scenario. The firm currently has an “Equal-weight” rating on the express delivery company’s stock.

Several other analysts have also upgraded their stock outlook. FedEx had its price objective raised by Cowen to $335 from $328. They currently have an outperform rating on the shipping service provider’s stock. Wells Fargo & Company lifted their price target to $331 from $286 and gave the stock an overweight rating. Raymond James lifted their price target to $280 from $165 and gave the stock an outperform rating. At last, Sanford C. Bernstein reaffirmed a buy rating and issued a $308 price target.

We think it is good to buy at the current level and target $330 as 100-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Analyst Comments

“FedEx’s modest F2Q beat likely falls short of a high bar that current valuation/expectations have set for the Parcels. Questions will be raised about toughening comps, the sustainability of Express momentum, and the surprising weakness in Ground margins as the search for a normalized EPS level continues,” said Ravi Shanker, equity analyst at Morgan Stanley.

“We see EBIT growth through YE of FY21 driven by both margin improvement and vol. driven rev. growth which is helped by limited Airfreight capacity and an eCommerce surge, though yields are mixed. We continue to see secular threats to Parcel and remain sceptical that these trends will be sustainable but believe that until there is evidence of a reversal in earnings momentum, the stock can trade at its historical multiple (14x PE) on current EPS,” Shanker added.

Upside and Downside Risks

Risks to Upside: 1) Variable cost structure better positions FDX vs. UPS in a secular battle for B2C and in choppy macro. 2)  Cost-cutting efforts should support improved returns. 3) Investor sentiment is low, multiple has reset lower – highlighted by Morgan Stanley.

Risks to Downside: 1) As one of the international trade-exposed companies we cover, FDX is exposed to macro/tariff risks. 2) After the breakup with AMZN, FDX is reliant on others for eCommerce growth. 3) Potential USPS reform.

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