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Argus Cautious over FedEx Near-Term Earnings Potential

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Argus downgraded FedEx (FDX) stock as the research firm appears to lack confidence over the logistics giant’s near-term earnings potential. On Tuesday, Argus analyst John Eade cut his rating on the stock to “hold” from “buy,” according to CNBC.

Eade noted that trade, tariff, and overseas macro concerns had taken a toll on FedEx stock in 2018 and 2019, according to CNBC. He believes that the factors mentioned above would persist in the near term and continue impacting FedEx’s short-term results as well as the stock price.

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FedEx is one of the most battered stocks in the logistics industry due to back-to-back dismal quarterly performances and concerns over global economic growth. The stock has lost 6.5% of its market capitalization this year so far. At its closing price of $150.42 on December 24, the stock was trading near its 52-week low of $137.78. Moreover, FedEx stock has fallen nearly 24.5% from its 52-week high of $199.32.

Additionally, the stock has underperformed the iShares Transportation Average ETF (IYT). The ETF, which holds 9.2% in FedEx stock, has gained 18.7% YTD (year-to-date). Among FedEx’s primary peers, United Parcel Service (UPS), XPO Logistics (XPO), and Old Dominion Freight Line (ODFL) stocks have returned 21.3%, 38.3%, and 52.2%, respectively, YTD.

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Why Argus downgraded FedEx stock

Eade cited numerous headwinds that could hinder the near-term recovery in FedEx’s earnings power. Eade is highly concerned about FedEx’s declining revenues and narrowing margins, particularly in the Express division.

Notably, FedEx’s total revenues in the second quarter of fiscal 2020 fell 2.8% year-over-year (or YoY) to $17.3 billion. The company’s pretax margin contracted 320 basis points to 3.2%. Dismal performance at the company’s FedEx Express division hurt its overall second-quarter financial performance.

FedEx’s Express segment revenue fell 5.4% YoY to $9.1 billion in the second quarter. The division’s operating margin shrink to 2.6% from 6.6% in the second quarter of fiscal 2019.

The logistics giant blamed weakening global trade and production as the main reason behind its dismal quarterly performance. Higher expenses, competitive pricing, and a mix shift to lower-yielding services pressured its second-quarter bottom-line results.

Eade believes that although management has undertaken several mitigating initiatives, it wouldn’t help FedEx boost its bottom-line results in the near term. CNBC reported that the analyst wrote, “Management has lowered guidance several times, and though it has a plan to reduce costs, we have little confidence in the company’s near-term earnings power.”

He added that conditions for logistics companies remain challenging, given the uncertainty over global trade and tariff issues. As a result, Eade chooses to remain neutral on FedEx despite the stock’s low valuation multiples. The analyst said that he would move FedEx stock back to a “buy” once it shows “signs of top- and bottom-line improvement.”

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Analysts change stance after dismal Q2 results

Eade is not the only analyst who lowered FedEx’s rating after its disappointing second-quarter financial performance. On December 18, Oppenheimer analyst Scott Schneeberger downgraded the stock to “market perform” from “outperform.”

Schneeberger stated that FedEx has a lot to prove to investors. The analyst hopes to see moderate improvement in FedEx’s results in the latter half of 2020. However, he believes that wouldn’t be enough to regain investors’ confidence.

According to a December 19 MarketWatch report, Schneeberger wrote to clients, “We believe the company’s ‘show me’ status is likely to persist multiple quarters until it demonstrates enhanced certainty of a return toward historical Express/Ground segment margin levels.”

Following Argus and Oppenheimer’s rating downgrades, the proportion of bullish stance son FedEx stock has decreased to 45% from 52%. Several other analysts have lowered their target prices on the stock following its disappointing Q2 results. The stock’s average target price has decreased to $170.08 from $173.12. Several recent downward target price revisions by analysts follow.

  • JPMorgan Chase cut its target price by $7 to $147 but reaffirmed its “hold” rating.
  • Morgan Stanley lowered its target price to $109 from $111 and reiterated its “equal weight” rating.
  • Bank of America trimmed its target price by $7 to $163, maintaining its “neutral” rating.
  • Wells Fargo, which had an “overweight” rating, cut its target price to $183 to $189.
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