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Why You Should Offload FedEx Stock Despite Q4 Earnings Beat

Zacks Equity Research

On Jun 25, FedEx Corporation FDX delivered a positive earnings surprise of 4.2%, when it reported fourth-quarter fiscal 2019 results (ended May 31, 2019). Notably, this was the first earnings beat for this Memphis, TN-based company in the trailing four quarters as shown in the chart below.

FedEx Corporation Price and EPS Surprise

 

FedEx Corporation Price and EPS Surprise

FedEx Corporation price-eps-surprise | FedEx Corporation Quote

However, the overall performance of the package delivery company was disappointing primarily due to persistent woes related to the company’s major revenue generating segment, FedEx Express, and higher costs at the FedEx Ground unit. Results at FedEx Express were hurt by the weakness in global trade and industrial production.

Stock Unlikely to Fly High in the Near-Term

What is worse is that headwinds like high operating expenses and the trade tensions between the United States and China are likely to hurt the stock going forward (at least in the near term). Moreover, the Trump administration’s recent proposal to implement additional tariffs on products from the European Union might impede growth at FedEx.

In calendar-year 2019, FedEx anticipates moderate economic growth on a global scale due to sluggish growth at developed economies. The ongoing row with Chinese telecommunications-equipment maker Huawei Technologies is an added challenge for FedEx.

Apart from trade woes between the United States and its trading partners, capital expenses at FedEx are on an upswing that will continue to hurt the bottom line. With FedEx investing significantly in facility upgrades, capital expenditures in fiscal 2020 are anticipated to be higher than the fiscal 2019 figure of $5.5 billion.

Due to the above-mentioned headwinds, FedEx issued a bearish outlook for fiscal 2020. Adjusted earnings are estimated to decline in mid-single-digits (expressed as a percentage) on a year-over-year basis. Apart from sluggish growth in the world economy and high costs, FedEx's decision to terminate an airfreight-delivery contract with Amazon.com AMZN is likely to hurt fiscal 2020 results.

Also, the fact that the Zacks Consensus Estimate for fiscal 2020 earnings has been revised 4.9% downward over the past seven days highlights the negative sentiment surrounding this Zacks Rank #5 (Strong Sell) stock. The company's Momentum Score of F highlights its short-term unattractiveness.

Bearish Industry Rank

Apart from the above-mentioned headwinds, we note that the industry, to which FedEx belongs, currently has a Zacks Industry Rank of 221 (out of 250 plus groups). The unfavorable rank places the companies in the bottom 14% of the Zacks industries. Studies have shown that 50% of a stock's price movement is directly tied to the performance of the industry group that it is in.

In fact, great stock in a poor industry is likely to underperform an average stock in a strong group. Therefore, taking the industry’s performance into account becomes necessary.  

Key Picks

Investors interested in the broader Transportation sector may consider Fly Leasing Limited FLY and Azul AZUL. While Fly Leasing sports a Zacks Rank #1 (Strong Buy), Azul carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Fly Leasing and Azul have rallied more than 24% and 100%, respectively, over the past year.

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