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Will High Costs be a Dampener to FedEx (FDX) in Q2 Earnings?

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FedEx Corporation (FDX - Free Report) is set to release second-quarter fiscal 2018 results after the closing bell on Dec 19.

Last quarter, the company posted a negative earnings surprise of 20.8%. Earnings (excluding 32 cents from non-recurring items) of $2.51 per share significantly fell short of the Zacks Consensus Estimate of $3.17. Furthermore, the bottom line declined 13.5% on a year-over-year basis due to higher costs.

Quarterly revenues increased 4.3% year over year to $15,297 million, lagging the Zacks Consensus Estimate of $15,368.7 million. The top line was hurt primarily due to the TNT Express cyberattack.

Things do not look up for the FedEx stock this quarter either. Let’s look into the factors responsible for such a bleak outlook.

Factors Likely at Play

FedEx's operations have been hurt by the TNT Express cyberattack in June. The effects of the attack are expected to hamper results in the second quarter too. Additionally, rising costs might affect the company’s bottom line growth. Moreover, expenses related to the integration process of TNT Express and the increased investments at its Ground unit are also likely to negatively impact the bottom line in the quarter to be reported.

The company’s efforts to meet the surging demand in the peak holiday season are increasing delivery costs with potential to further hit the quarterly earnings performance.

The company’s high-debt levels further add to its woes.

However, strong growth of e-commerce is anticipated to boost the top line in the quarter. Notably, the Zacks Consensus Estimate for revenues at the FedEx Express (including TNT Express) division stands at $8,911 million, higher than $6,743 million a year ago. For Ground and Freight revenues, the Zacks Consensus Estimate is pegged at $4,793 million and $1,685 million, respectively, greater than the year-ago figures of $4,419 and $1,597 million, respectively.

Earnings Whispers

Our proven model does not conclusively show that FedEx is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as elaborated below.

Zacks ESP: FedEx has an Earnings ESP of -0.59%. This is because the Most Accurate estimate is pegged at $2.85 per share, higher than the Zacks Consensus Estimate of $2.87. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: FedEx has a Zacks Rank #3 (Hold), which increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against Sell-rated stocks (#4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

FedEx Corporation Price and EPS Surprise

 

FedEx Corporation Price and EPS Surprise | FedEx Corporation Quote

Stocks to Consider

Investors interested in the broader Transportation sector may consider the following stocks with the right combination of elements to deliver an earnings beat in their upcoming releases:

American Airlines Group, Inc. (AAL - Free Report) has an Earnings ESP of +1.41% and a Zacks Rank #3.

Allegiant Travel Company (ALGT - Free Report) has an Earnings ESP of +5.07% and is a #3 Ranked player. You can see the complete list of today’s Zacks #1 Rank stocks here.

CSX Corporation (CSX - Free Report) has an Earnings ESP of +1.24% and a Zacks Rank of 3.

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