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FedEx Earnings Preview: Macro Factors To Continue Pressuring Transport Giant

FedEx (NYSE:FDX) reports Tuesday, March 17th, 2020 after the close and my guess is that Irish Eyes won’t be smilin’ on Beale Street as the transport giant continues to get kicked right in the teeth with “macro” developments and the Covid-19 shock.

For fiscal 2020 which ends May ’20, the express and ground shipping giant is expected to generate $10.41 in EPS on $68.7 bl in full-year revenue. For just a slight decline of 1% in expected revenue in fiscal 2020, EPS is expected to fall by 40% from around $15 to $10 in EPS, not all of which is FDX’s inherent operating leverage with a large fixed-cost operation.

Ground expenses grew rapidly the last few quarters probably to stem market share losses from the encroachment of Amazon’s 24-hour delivery service, which seems to be everywhere in Chicago.

In addition to that competitive pressure, Morningstar noted that the EU industrial economy slowed late in 2019, and we already knew of the slowing trans-Pacific issues with trade and tariff spat that was such a big part of the headlines in 2018 and 2019.

FedEx is now a 2021 story with the arrival of Covid-19, since it is burying the European, Chinese and American economies for at least a few months.

Technically FDX has traded through its 200-month moving average at $125 per share. That is a 55%-60% correction in the stock since its peak in January, 2018. In 2007-2008 FDX lost 72% of its value from peak-to-trough, i.e. $120 down to $34 by March ’09.

After selling at $150-$160 on the way up a few years ago, FDX was repurchased too early on the way down over the last two years. FedEx Ground needs to get realigned with the emergence of Amazon (NASDAQ:AMZN) and other competitors in the 24-hour delivery biz (although one headline 4-6 weeks ago noted that FedEx was once again carrying some Amazon packages) and China, Europe and the U.S. will need to start seeing sustainable economic growth.

Long a small position, investors have to envision a world beyond the next few months when all the global economies start to hum again in order to own the stock here.

Here is a letter that we sent out to clients yesterday, via email:

Pundits always look for the “allegory” in investing, i.e. this pullback is like this period, or this rally is like that period, and I was thinking about it this weekend, today’s “demand shock” (the U.S. consumer self-quarantining, and changing habits) is much more like 9/11 than 2008.

Today, the U.S. financial sector is in MUCH, MUCH better shape than in 2008. 2008 was a “rotting from within” from the housing and mortgage credit excess and 2008 took several years to fix.

Coming into this demand shock in the U.S., the only real excess I saw (or heard from U.S. economists) was in the U.S. bond markets and really just very low interest rate levels. (There is some worry over the amount of BBB-rated debt outstanding.)

The point being this should result in a faster bounce as America returns to normal daily habits.

Dr. Scott Gottlieb (Former FDA Commissioner) was on CNBC early this morning and along with Dr. Fauci, have become the voices of reason (and apolitical voices at that) and Dr. Scott Gottlieb said that he thought the Covid-19 cases would start to peak and roll over by mid, late-April, based on early and aggressive action that cities like New York and Chicago have taken, versus Italy and Europe dragging their feet.

Dr Gottlieb and others have made an interesting point: the pain in cancelling the pro hockey, basketball, baseball, seasons, etc. closing restaurants and bars, etc. will impact the U.S. economy immediately, but the frequency and severity of the Covid-19 infections, could be greatly diminished, thus the U.S. should be able to come out of this far quicker than other countries.

The next two weeks will be interesting in America. GDP will likely plummet, but will then snap-back quickly as normalcy is returned.

Thursday’s jobless claims numbers and numbers over the next few weeks will likely soar as folks leave the consumer-facing workforce and apply for temporary unemployment.

Clients should prepare for some bad economic data the starting late March, early April.

The U.S. stock market has now been out in front of this: there is likely more pain ahead for U.S. stocks. One data point I’m looking forward to is infection numbers with widespread testing.

Bob Doll of Nuveen is the first i have heard / read / seen that is thinking a bottoming process may be beginning in the U.S. stock market. Bob Doll and LizAnn Sonders of Charles Schwab were the first to raise the prospects of a correction in September, 2018, before the 20% correction in Q4 ’18. They are both worth the regular read.

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