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FedEx Laid Low By Express Unit Weakness, Ground Segment Costs

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Recently, we issued an updated research report on FedEx Corporation FDX. The company is being hurt by the slowdown in global trade, which, in turn, is affecting the performance of FedEx Express, its primary revenue-generating segment. Escalated costs at its Ground unit also remain concerns.

Mainly, due to the above headwinds, shares of FedEx have underperformed its industry so far in 2019. The stock has depreciated 6%, as against the industry’s 10.4% year-to-date gain.

Let’s examine the headwinds hurting FedEx in detail.

FedEx’s persistent below-par performance on account of weak global economy due to the U.S.-Sino trade tensions and higher costs are concerning. The slowdown in global economy is significantly affecting its primary segment, FedEx Express. Additionally, FedEx’s decision to not renew a shipping contract between its Express division and e-commerce giant Amazon (AMZN - Free Report) hurt the segment’s first-half fiscal 2020 results. Evidently, segmental revenues slipped 4.2% in first-half fiscal 2020. Although the trade tensions seem to be easing now, with the recent phase-one trade deal between the two largest economies, the industry is likely to remain under pressure unless the trade war is fully resolved.

Additionally, the second-quarter fiscal 2020 (ended Nov 30, 2019) results of FedEx's Ground unit were hurt due to the company’s decision to not renew its ground delivery contract with Amazon. Segmental operating income came in at $342 million, slumping 42% year over year, while operating margin contracted to 6.4% from the prior-year quarter’s 11.5%. The decision to end the partnership with Amazon was announced this August.

While releasing its fiscal second-quarter results in December, FedEx trimmed its fiscal 2020 adjusted earnings outlook for the second time in the fiscal year. FedEx’s earnings (prior to the year-end MTM retirement plan accounting adjustment and excluding TNT Express integration expenses) are now anticipated to be $10.25-$11.50 per share. During the first quarter of fiscal 2020 earnings release, the company trimmed its fiscal 2020 earnings view to $11-$13. The latest decision to slash its earnings outlook was due to expectations of lower revenues in each of the transportation segments, and elevated costs due to expansion of the seven-day delivery service at the Ground unit.

With FedEx investing significantly in facility upgrades, capital expenses have been flaring up. Capital expenses are expected to be $5.9 billion for fiscal 2020, higher than the fiscal 2019 figure. Additionally, integration expenses pertaining to TNT Express are perking up costs. FedEx believes it will incur a total of $1.7 billion toward TNT Express integration expenses through fiscal 2021. The dispute with Chinese telecommunications-equipment maker, Huawei Technologies, is an added concern for FedEx, which competes with United Parcel Service UPS in the package-delivery space.

Estimate Revisions & Zacks Rank

Downward estimate revisions highlight the pessimism surrounding the stock. In fact, the Zacks Consensus Estimate for fiscal 2020 earnings has been revised 9.1% downward over the past 60 days.

Given this bleak backdrop, FedEx’s Zacks Rank #4 (Sell) is well justified.

A Stock to Consider

Investors interested in the Zacks Transportation sector may consider Allegiant Travel Company ALGT currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Allegiant’s shares have gained in excess of 72% in a year’s time.

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