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Bear Of The Day: FedEx (FDX)

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FedEx (FDX - Free Report) has lost more than 30% of its value over past 52-weeks with international headwinds being the key catalyst for this decline. FedEx just released an earnings beat earlier this week but management’s guidance for its largest segment, FedEx Express, was softer than expected. Analysts have significantly reduced EPS estimates for 2020 and 2021, pushing FDX to a Zacks Rank #5 (Strong Sell).

TNT Acquisition & FedEx Express

The TNT Express acquisition in 2016 for $4.4 billion was meant to expand FedEx’s international presence to rival top competitor, UPS (UPS - Free Report) , who has already established global distribution. FedEx Express, which includes TNT, is now able to service 220 countries making up 99% of the world GDP.

Weaker than expected international growth over the past year or so, along with some systemic cost concerns, have been dragging FedEx down with TNT. FedEx Express isn’t producing the same top-line growth that it anticipated with soft European and Chinese output. This segment saw a 7% year-over-year decline in operating income as revenues and margins are pinched.

FedEx Express makes up over 50% of the firm’s top-line but its low profitability is shrinking the business’s overall margins. In FDX’s earnings release earlier this week, management voiced their uncertainty about this segments future performance, lowering their 2020 guidance, and pointing to global economic slowdown and trade disputes as the cause for concern.

Amazon Effect & Broader E-Commerce

FedEx announced earlier this month that it would not be renewing its US air delivery contract with Amazon (AMZN - Free Report) and emphasized how little they rely on them for their top-line, quoting that Amazon only makes up about 1.3% of revenues and are not concerned about Amazon’s in-house delivery. For a company that is stressing the importance of growing their e-commerce exposure, this is a very precarious move, with Amazon controlling almost 50% of the US e-com market.

FedEx continues to lose e-commerce market share to UPS. UPS deals with more than 20% of Amazon’s volume and makes up more than 50% of the US e-com market. FedEx needs to rethink its e-com strategy if it is going to make it a “focal point” of its business model moving forward.

Other Risk Factors

FedEx runs the largest fleet of cargo aircrafts in the world. It is extremely capital intensive to keep these planes in the air, not to mention the volatile jet fuel costs that are associated with it.

FedEx’s fuel exposure poses some risks for the firm as fuel prices rise. The capital needed to maintain this excessive air fleet might not be available if the economy were to turn south, which is on all investor’s radars with the looming trade disputes and weak global growth figures.

Take Away

I wouldn’t be putting a short position on FedEx quite yet, but I would limit my exposure. FDX is being traded at very low multiples but for a good reason. The uncertainty in FedEx’s largest segment is cause for concern and could weigh heavily on the business’s future earnings. With slowing international business output, a decrease in FedEx Express’s volume is inevitable. Their net margins are shrinking fast, currently sitting below 1% and it will not take much for that to tilt negative.


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