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Bear of the Day: FedEx (FDX)

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Investors are rightfully on the hunt for bargains, as stocks have shown stronger signs in recent trading sessions and some of the market’s most-battered companies welcomed a rebound. With that said, even some of the most beaten down stocks still look like ones to avoid thanks to sluggish trend in earnings estimates.

One such example is FedEx (FDX - Free Report) . The shipping giant has lost nearly 30% of its value over the last six months, largely because of a weak earnings report and guidance issuance that was delivered in mid-December.

FedEx posted adjusted earnings of $4.03 per share in the most recent quarter, missing the Zacks Consensus Estimate by two cents. Revenues managed to improve 9.3% from the year-ago period to reach $17.8 billion and beat consensus estimates, but Wall Street was unimpressed with the rest of the story FedEx told.

Namely, FedEx trimmed its earnings per share guidance for fiscal 2019. The company now expects adjusted earnings in the range of $15.50 to $16.60 per share, down significantly from prior guidance of $17.20 to $17.80 in earnings per share.

Another notable piece of FedEx’s outlook was management’s commentary on its Express segment. The company had planned for this unit to reach $1.2 to $1.5 billion in revenue by fiscal 2020, but it now thinks that is unlikely to happen.

FedEx said this weakness is attributable to lower-than-expected express package volume due to sluggishness in the European economy. Overall, the company said that the major segment’s performance is declining, thanks to a global slowdown in trade over the past few months. FedEx Express accounts for a plurality of the company’s total revenue.

Weakness in Europe and other key markets is a real concern for FedEx. This is not only troubling for near-term results, but also long-term growth plans. For instance, FedEx opened a new hub in Shanghai earlier this year in order to boost its presence in China. With trading activity slowing in the Asian economic powerhouse, this initiative is likely off to a slow start.

Sluggish activity comes at a particularly tough time for FedEx, as the company is also shelling out large amounts of cash in an effort to upgrade facilities and integrate a new acquisition, TNT Express. FedEx’s total capital expenditures were up 11% to $5.66 billion in fiscal 2018, and the company has forecast for roughly the same amount of spending this year.

FedEx is also relatively highly leveraged. The company has a long-term debt-to-capitalization ratio of 45.9, which compares unfavorably to the market’s average of 42.9.

Moreover, FedEx is sporting a Zacks Rank #5 (Strong Sell) right now. The foundation of the Zacks Rank are earnings estimates and earnings estimate revisions. When analysts become more optimistic about a company’s earnings outlook, typically that’s a bullish indicator for the stock.

But the opposite is also true, so investors should avoid stocks with slumping EPS estimates. And of course, FedEx has seen a plethora of negative revisions since its earnings outlook and weak guidance. The Zacks Consensus Estimate for its fiscal 2019 is down to $15.90 from $17.34 thanks to 11 negative revisions, and that’s just near the middle of the company’s guidance. If the aforementioned pressures pile on, FedEx could even underperform that muted consensus, which would drag the stock down further.

Unfortunately, investors looking for better options in the transportation business have limited options. In fact, our “Transportation - Air Freight and Cargo” group falls in the bottom 11% of the Zacks Industry Rank, and no stocks in the category have a buy rank. That said, FedEx rival UPS (UPS - Free Report) does have a Zacks Rank #3 (Hold).

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