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Transportation sector is one of the most telling indicators of a country’s economic health. And if we follow the latest news coming from this sector, then the things do not look particularly bright for the economy.
One of the biggest players of transportation sector, FedEx (NYSE:FDX) slashed its outlook for fiscal year 2013. However, instead of worrying about the overall economy, I am going to analyze the impact of the news on the company stock itself. FedEx specializes in document shipping and express parcel delivery. With sluggish economy, its customers decided that express shipping is actually not that vital, at least not in the current scenario and this new attitude is sure to hit FedEx’s bottom line real hard.
FedEx has long been seen as a consistent stock and after touching its lows in 2009, it has been more or less range-bound. The stock gained more than 15 percent in the last 12 month, but would the latest outlook cut have significant impact on its stock price? While the company is not all gung-ho about its full financial year, it delivered better than expected numbers for the fiscal first quarter of the year. While its overall revenue increased 3 percent on year over year basis, its key segment, FedEx Express grew its revenue by only 1 percent, which is a cause of worry. The company holds leadership position in Express segment and any sluggishness in this area is likely to strain the overall margins.
However, it is not just the US economy which is going to have negative impact on the company fortunes. FedEx also expects its international business to have slower growth rate. For the first quarter, its international numbers were better but FedEx expects to lose business to ships. In order to counter the impact of tighter revenue, the company plans to cut costs from its Express Air Freight segment. Company officials, however, declined the possibility of lay-offs. During the first quarter, its Express segment witnessed 28 percent lower operating income.
FedEx is not taking the decline in Express business lightly. The company officials seem to be of the view that the shift is not transitory but a more permanent phenomenon. The new circumstances have made FedEx rethink its philosophy and business model. The company will be unveiling new plans for its Express segment during its investor meeting in October. FedEx is planning to use more fuel efficient airplanes for cutting growing costs. It is also expected to retire older planes and may not replace them with newer aircrafts. In order to grab a share of sea freight pie, the company now offers ocean shipping through its FedEx Trade Networks. The diversification plan seems to make sense as the company tries to adjust itself to decline in Express volumes.
But all is not lost for FedEx. The slowdown in its business has got to do more with the overall economy than with any fundamental flaw within the company. Its main competitor UPS was also forced to trim its forecast due to gloomy economic stance. As and when the economy bounces back, FedEx is in good position to grow at the faster pace. The company has conservative debt load and thus has more financial flexibility. UPS has Debt Equity ratio of 1.686, whereas FedEx much healthier ratio of 0.157. Its stock is also trading at reasonable Price Earnings ratio of 13.58, much lower than UPS’ Price Earnings ratio of 18.47. The lower PE ratio makes the stock much more attractive at the present levels.
However, I would employ wait and watch policy for this stock as there are some red flags to watch out for. The company cut its forecasts below the consensus levels and it is not a good sign. FedEx now expects to earn in the range of $6.20 and $6.60 per share for the entire year. Earlier, it had pegged the estimates in the range of $6.90 and $7.40 and the consensus estimates stand at $7.44 per share. So, it seems like the insiders are not as confident as the outsiders as far as the near future prospects are concerned. It also slashed its forecast for the second quarter to $1.30 to $1.45 per share range. The company expects 3.9 percent increase in its net shipping rates, but it is yet to be seen whether the increase would be substantial enough to counter the decline in volumes.
Barclays has reiterated its faith in the stock by giving it Overweight rating. Bank of America also rates the stock as Buy, but cut the price target from $100 to $98. The stock is currently at $85.76 and thus has good upside left. However, I would wait for some solid positive news from the company before initiating any position.
Excellent article, Ed.
bull crap this company is going down the drain they dont treat their employees well an they want to work you like a slave an you will not get a raise only when fedex feels like giving you one. Advice to all the young people looking for jobs its good quick money but its not a future you can find something better