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Can FedEx (FDX) Stock Turn Things Around with Upcoming Q2 Earnings?

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FedEx (FDX - Free Report) will report its second quarter fiscal 2020 performance after the market closes on Tuesday, December 17. The company has had a slow year, up 2% to underperform the broader transportation market’s 13% run.

FDX stock will take some momentum into its Q2 earnings report, as its shares have climbed about 5.3% in the past four weeks. However, the company is coming off a first quarter performance that sent its shares down over 12% after it missed estimates and slashed its financial guidance.

FedEx Slashes Guidance

Last quarter, FedEx reported net revenue of $17.1 billion, which came in flat compared to the year ago quarter. Meanwhile, its bottom-line saw a decline of 11.8% to $3.05 per share. The company’s Express and Freight segments both fell 3%, while its Ground segment saw growth of 8%.

FedEx’s shaky first quarter performance prompted management to cut its fiscal 2020 earnings guidance from $14.59-$14.90 per share, down to $11-$13 a share. Management attributed the weak performance to a slowdown in the global economy, worsened by the trade war.

FedEx CFO Alan Graf said that full-year 2020 capital spending would come in at $5.9 billion, with full-year 2021 "similar" to 2020. The increased capital expenditures worried some investors, who were expecting 2020 to lead to a cut in capital spending plans in 2021.

Outlook

The macroeconomic environment hasn’t been favorable for FedEx, but with reports of a phase one deal reached in principle, can FedEx turn things around?

FedEx has continued to invest in expanding capacity in order to meet future demand for e-commerce deliveries. CEO, Fred Smith believes that FedEx needs to make capital spending commitments in order to keep its "competitive positioning against major competitors."

FedEx opted to not renew its contract with Amazon (AMZN - Free Report) in August as FedEx didn’t like how the ecommerce giant was trying to undercut it. Even though Amazon only represented 1% of FedEx’s total revenue last year, FedEx may lose out on a potential growth market.

FedEx didn’t want to help out a competitor that consistently was trying to get the upper hand in the delivery space. FedEx now is most likely looking for partnerships with large retailers like Walmart (WMT - Free Report) and Target (TGT - Free Report) , which are both also in an intense race with Amazon.

Our Q2 Zacks consensus estimates call for net revenue to slip 1.4% to $17.6 billion and for earnings to plummet over 30% to $2.80 per share.

More specifically, the Express segment is projected to drop 3.7% to $9.25 billion and the Ground segment is anticipated to climb 6% to $5.45 billion. The Freight segment is forecasted to reach $1.89 billion for a slight 1.8% decline in the second quarter.

Bottom Line

Top and bottom line declines are projected to continue in what FedEx’s management has dubbed a ‘transitional year.’ The ongoing trade war has been detrimental to FedEx as its sales in China, which could be a huge market, have substantially decelerated.

Amazon’s growing logistics network could see fellow large retailers follow Amazon’s blueprint, which could hurt FedEx. The stock remains in a slump as its shares have declined 16.5% over the past three years.

FedEx stock is also trading at 13X its forward earnings, which is right on par with the industry average. Its dividend yield of 1.58% is the highest in a decade, which might help anchor shareholders while the company tries to climb out of its slump.

However, FedEx’s earnings have been revised lower, helping earn FDX stock a Zacks Rank #4 (Sell).

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