The REAL Story Behind the FedEx Stock Pullback

Global shipping and logistics giant FedEx (NYSE: FDX) posted better-than-expected earnings on Tuesday. But that didn’t help FedEx stock from falling more than 4% in early market trading. Investors pay closer attention to FedEx earnings reports than most others, because FedEx is widely viewed as a bellwether for the broader U.S.
FedEx delivered a quarterly report that exceeded expectations on adjusted earnings. However, the company lost money overall in the fiscal fourth quarter, on higher-than-anticipated costs relating to the major takeover of European shipping giant TNT Express. This spooked investors, and in a low-growth economy that has showed signs of slowing down, it is not surprising to see the market’s negative reaction to the FedEx earnings news.
However, for investors with a long-term focus, FedEx remains an attractive growth story.

Fedex Growth Story Remains Intact

FedEx lost $70 million last quarter, due to merger-related costs as well as higher pension costs. However, adjusting for these one-time charges, the company would have earned $3.30 per share. This adjusted figure came in ahead of expectations, which called for $3.26 per share.
Investors are also having a tepid reaction to FedEx’s current year guidance. The company expects to generate $11.75-$12.25 per share in adjusted earnings. The midpoint of that range is slightly below analyst expectations.
On the plus side, FedEx is still growing. Total revenue increased 6% in fiscal 2016, to $50.37 billion. Last year was the first time in which FedEx generated more than $50 billion of revenue. Adjusted earnings per share jumped 20% year over year, and FedEx reassured investors on its conference call that it expects earnings to continue growing over the next several years, assuming moderate global economic growth.
For fiscal 2017, adjusted earnings per share are expected to grow 11%. The company is enjoying particularly strong results in the ground segment, where revenue increased 20% last quarter. A major driver of this growth is the boom in e-commerce.
In order to keep up with the demand, FedEx plans to invest more than $5 billion this year to expand its ground network and also purchase new aircraft. This will likely create more pressure on earnings over the next few quarters, but the long-term story remains intact.

Short-Term Concerns Overblown

The share price took a dip on the FedEx earnings report, and the higher investment and acquisition costs may cause additional volatility in the short-term.
However, it is important to remember that although FedEx’s $5 billion acquisition of TNT Express will keep earnings growth contained in the short term, it should boost long-term growth. The merger allows FedEx a stronger presence in the high-growth area of cross-border e-commerce traffic, thanks to TNT Express’s strong European road network.
And, it is worth noting that one of the key factors suppressing FedEx’s growth is currency. The rising U.S. dollar has under-cut growth for FedEx because the company has a significant international presence.
These issues will continue to pose a challenge in the near term, but FedEx still anticipates 2.3% growth in global GDP in 2016, and 2.8% next year.
Growth in e-commerce is likely just beginning, and e-commerce would be virtually impossible without FedEx. The company has a long runway of growth ahead of it. The stock appears expensive, but when evaluating it based on adjusted earnings, it could be viewed as cheap.
FedEx stock trades for approximately 13 times the midpoint of the company’s fiscal 2017 earnings per share guidance. This is a fairly modest multiple for a company that could post double-digit annual earnings growth. And, FedEx returns a lot of cash to shareholders. On June 6, FedEx raised its quarterly dividend by 60% and the company repurchased billions of stock each year, which should provide a future tailwind for earnings per share.
Investors will likely need to be patient. The stop slipped on the FedEx earnings news, but FedEx is still a long-term growth story.

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