FedEx Q2 Earnings: What Can Investors Expect?

FedEx (FDX) will likely disappoint investors again. The company is scheduled to report its second-quarter earnings results on Tuesday. Overall, analysts expect the company’s earnings for the second quarter of fiscal 2020 to fall for the fourth consecutive quarter. Analysts expect FedEx’s second-quarter earnings to fall 31.5% YoY (year-over-year) to $2.76 per share.

What could hurt FedEx’s Q2 earnings?

Dismal top-line results and increased expenses will likely weigh on FedEx’s second-quarter earnings. Analysts expect the company’s second-quarter revenues to fall 1.4% YoY to $17.6 billion. Analysts’ top-line forecast for FedEx’s second-quarter earnings is the lowest it has been in the past 13 quarters. The dismal revenue projection reflects sluggish international volumes due to the global trade slowdown.

For the past few quarters, FedEx has been witnessing declining international revenues. The company’s revenues from its international business fell nearly 3% YoY in the first quarter of fiscal 2020. FedEx stated that the slowdown in global trade and production had a negative impact on its international business revenues.

According to the company, uncertainty about US-China trade negotiations caused the softer trade environment in the Asian region. Also, FedEx noted that the negative manufacturing output in Germany hurt its European business.

FedEx warned that its financial results would continue to suffer from the factors mentioned above in the near term. The company’s mix shift to low-yielding services could also weigh on its second-quarter revenues and earnings results.

Additionally, increased investments in facility upgradation and higher costs due to TNT Express’s integration could drag on FedEx’s second-quarter bottom-line results. The company is aggressively investing in enhancing capabilities to grab market share in the e-commerce delivery space.

Recently, FedEx started the seven-day ground delivery service. The company also announced that it will forgo the residential peak surcharge during the 2019 holiday season. The move reflects FedEx’s strategy to attract more small and medium e-retailers to use its delivery services. Notably, the company is also working to develop an autonomous delivery solution, known as “SamDay Bot,” for small packagers and short distances.

Amazon contract impacts FedEx’s earnings

Shrinking business relations with Amazon (AMZN) could have a slight negative impact on FedEx’s second-quarter performance. Over the past six months, FedEx has ended two delivery contracts with the e-commerce giant.

In June, the company didn’t renew the express delivery contract for Amazon’s domestic packages. Later in August, the logistics giant terminated the ground-delivery contract for Amazon’s small parcels in the US.

Amazon accounted for nearly 1.3% of FedEx’s total revenues in fiscal 2019. Therefore, we think that the foregone Amazon volumes could hurt FedEx’s second-quarter financials. Earlier, the company stated that cutting ties with Amazon would hurt its financials in the near term. However, FedEx thinks that the strategy will free up its resources. Now, the company will be able to focus on the broader e-commerce market.

Peers’ expectations

Most of FedEx’s logistics peers will report their earnings results for the fourth quarter of fiscal 2019 in January next year. Analysts’ earnings expectations for United Parcel Service (UPS) reflect a potential YoY rise of 8.7% to $2.11 per share. Overall, they expect UPS’s revenues to rise 3.9% YoY to $20.6 billion.

For XPO Logistics (XPO), analysts expect the fourth-quarter EPS to rise 46.5% YoY to $1.05. However, the revenues estimates of $4.2 billion reflect a YoY decline of 3.3%. Analysts’ fourth-quarter earnings predictions of $1.83 per share for Old Dominion Freight Lines (ODFL) signifies a decline of 6.3% YoY. They expect the company’s revenues to fall 1.4% YoY to $1 billion.

Analysts turned bullish ahead of earnings

Despite analysts projecting another dismal quarterly performance, they have raised their target prices in the past few weeks. The recent optimism could be due to hope about a positive trade deal between the US and China.

Notably, FedEx has been stuck in the middle of the US-China trade war. As a result, the company faced multiple probes. Chinese officials threatened to blacklist FedEx. China retaliated against the US government’s ban on Huawei Technologies and tariffs on Chinese imports.

In previous quarterly reports, FedEx stated that the US-China trade war is hampering its logistics volume in Asia. Blacklisting in China would have enhanced the company’s problems. China accounts for nearly 6% of FedEx’s total revenues.

The threat has somewhat cooled-off in recent months. The US and China want to resolve the dispute. Therefore, analysts are slightly optimistic about FedEx. Recently, investment research firms raised their ratings and target prices including:

  • JPMorgan Chase raised FedEx’s target price to $154 from $140.
  • Baird increased the target price on the stock by 6.5% to $165.
  • UBS raised the rating on the stock to “neutral” from “sell” and increased the target price to $161 from $132.
  • Wells Fargo initiated coverage on FedEx stock with an “outperform” recommendation and set a target price of $189.

Reuters-polled analysts have provided a consensus “buy” recommendation on FedEx stock. As of today, about 52% of the 29 analysts covering the stock have a bullish stance. Approximately 45% of the analysts recommend a “hold,” while the remaining 3% have a bearish view. Meanwhile, the average target price of $173.12 reflects an upside of 4.5% over the next year.