The Ratings Game: FedEx’s stock rallies in a bad market, with Wall Street encouraged by China ‘rebound’
Shares of FedEx Corp. surged Wednesday, to buck the sharp selloff in the transport sector and the broader stock market, as a fiscal third-quarter revenue beat and a rebound in its China business helped soothe Wall Street concerns over COVID-19-related uncertainties.
ran up 5.0% to $99.68, despite the 10.4% tumble in the Dow Jones Transportation Average
and the Dow Jones Industrial Average’s
1,338-point, or 6.3% plunge. FedEx shares have lost 37.1% over the past month, while the Dow transports has shed 35.8% and the Dow industrials has given up 31.9%.
Analyst Patrick Brown at Raymond James cut his price target to $150 from $167, but maintained the outperform rating he’s had on FedEx for at least the past three years.
He said that despite the “fluid” negative impact of the COVID-19 pandemic, which comes on the heels of trade uncertainty, a slow global industrial environment and unanticipated start-up costs around FedEx Ground’s 7-day service, he believes there is “limited further downside” for the stock as investor sentiment appears to be “washed out.”
The stock closed Monday at the lowest price since December 2012.
Although the outlook for FedEx’s Europe and North America businesses remain unknowns given COVID-19 concerns, the recent improvement in demand to and from China has been “clearly encouraging.”
FedEx reported late Tuesday net income that fell to $315 million, or $1.20 a share, from $371 million, or $1.41 a share, in the year-ago period. Adjusted earnings per share, which excludes non-recurring items, came to $1.41, matching the FactSet consensus. Revenue rose 2.9% to $17.5 billion, above the FactSet consensus of $16.9 billion.
The company said it was pulling its full-year guidance given uncertainties regarding the spread of COVID-19.
On the post-earnings conference call with analysts, Chief Marketing and Communications Officer Brie Carere said, “In China, we have seen a rebound week-over-week since the week of March 3,” according to a FactSet transcript.
She said 90% to 95% of large manufacturers are now back to work, while about 65% to 70% of small businesses are coming back to work from a manufacturing perspective.
“With the urgent need for stock replenishment and with air capacity shortage in the market, we believe demand will stay elevated,” Carere said.
In the U.S., she said volume from FedEx’s largest retail customers are rising, “as social distancing efforts are encouraging consumers to shop from home.”
Raymond James’ Brown said fiscal 2020 will likely be just a “throw away year,” as he believes the investments FedEx has made across its portfolios position the company to reap future operational cost benefits, synergies and growth.
Meanwhile, BofA Securities analyst Ken Hoexter wasn’t quite as optimistic, as he cut his price target to $115 from $168 and reiterated his neutral stance.
While it was encouraging to see China was recovering, Hoexter said results were “especially disappointing” at FedEx Ground, as margins for that segment fell almost 500 basis points (5 percentage points) from last year despite an 11% rise in revenue.
Basically, Hoexter said that beyond COVID-19, FedEx continues to face “big challenges.”
Deutsche Bank’s Amit Mehrotra reiterated his hold rating, as the quarter’s results were “very weak” on an absolute basis, but in line with “very low” expectations.
“To offer a sense of how weak the results were…consolidated operating margins were just 2.8% (and that excludes TNT-related expenses, [the acquisition of] which was completed approximately 3 years ago) — the second worst quarterly profit margin since at least 1998 (the weakest was at the height of the financial crisis at 2.2%),” Mehrotra wrote.
He said management’s decision to withdraw the 2020 guidance was understandable, “but not helpful in an environment where investors are assessing trough EPS power.”
KeyBanc Capital analyst Todd Fowler kept his rating at sector weight — he doesn’t have a price target for the stock — as any benefits from a rebound in China and boost from increased e-commerce activity was balanced out by uncertainties surrounding the COVID-19 pandemic, and resulting economic weakness.
“While visibility is admittedly low, we anticipate some near-term benefit as Chinese manufacturing more fully resumes, combined with a dearth of passenger air cargo capacity (with the potential for similar dynamics elsewhere in coming quarters), as well as increased [business-to-consumer} demand in Ground,” Fowler wrote. “That said, a more pronounced global slowdown could offset these benefits intermediately.”