Stock of the Week
NYSE Symbol: FDX
Industry: Transportation Services
Price as 3/11/19: $176.45
After a lousy end to 2018, the major averages have rebounded 10% to start the new year. Back in December investors were concerned of slowing global growth. This weeks' featured stock, FedEx exacerbated those concerns when they reported earnings on December 18th and proceeded to dramatically cut 2019 guidance from $17.20-17.80 a share to $15.50-16.60 a share. FedEx cited lower-than-expected express package volume from their European subsidiary, TNT Express. FedEx saw the weakness in Europe accelerate during the fourth quarter. FedEx's stock fell 33% in the month of December dropping to a three-year low. From the December lows, FedEx has rebounded 17%. FedEx will report quarterly earnings next week so cautious investors may want to wait and see their earnings, but long-term, FedEx remains an attractive stock with strong fundamentals and a strong balance sheet.
Large and mega mergers have not rewarded shareholders the last several years. GE and Kraft Heinz come to mind along with FedEx's 2016 acquisition of TNT Express. Since the acquisition, all FedEx has seen is write downs. FedEx management still expects to realize long term benefits from TNT Express with net income of $1.2 billion to $1.5 billion.
Currently no one is expecting much good news from next week's earnings release. FedEx may lower guidance or take more write downs to cut costs further, but with the stock trading near a three-year low, the stock could be close to a bottom. Even with the analyst downgrades and earnings revisions, FedEx is still expected to generate over $4 billion in net income for 2019. Currently the stock trades for 11 earnings, 0.6 times sales and 2.3 times book value. Investors will a long-term time horizon should expect FedEx to get costs down and reaccelerate earnings and sales growth. Citigroup downgraded the stock last week and lowered their price target to $210 a share which still represents 20% upside form current levels. Three months ago, FedEx was expected to earning $20 a share in 2020. If FedEx can achieve that goal of $20 a share in a couple years and get a market multiple of 15 times earnings, then the stock has 50% upside going forward. In the short term, investors should look for more cost cuts, a new share buyback plan and hopefully some insider buying signaling the worse may be over.
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