Shares of FedEx (FDX 157.67, +1.69, +1.1%) are trading higher following the transport component's fiscal fourth quarter earnings results. Those results were just okay relative to expectations while the company's fiscal 2020 outlook failed to measure up.
How is that combination a recipe for a higher stock price? It isn't. The manner in which shares of FDX traded ahead of the company's earnings report is the recipe for the higher stock price.
FDX declined 6.4% in the four sessions preceding last night's report, yet it was down 22% from its mid-April high and down 43% from the all-time high it reached in January 2018.
Accordingly, investors weren't caught off guard by the company's conservative-sounding guidance for fiscal 2020, which calls for a mid-single-digit percentage point decline in adjusted earnings from $15.52 reported for fiscal 2019.
That disappointment had been anticipated. The reason being is that FedEx has been caught in a cauldron boiling over from trade tension with China, slowing global growth, and increased competition from UPS (UPS 98.84, +1.71, +1.8%) and Amazon (AMZN 1895.80, +17.53, +0.9%). At the same time, FedEx is making strategic investments to enhance the capabilities of its ground service to meet the exploding e-commerce delivery business.
Investor sentiment has been hamstrung by reports that FedEx is at risk of being named to China's unreliable entities list as the company works to comply with the U.S. order that prevents U.S. technology companies from doing business with Huawei. FedEx for its part recently sued the Dept. of Commerce in a bid to gain an exception on the grounds that it is impossible for FedEx to police every shipment.
There are a lot of known unknowns surrounding FedEx at this time. The known components have forced its stock sharply lower, whereas, the unknown aspect of those components (What will happen with China trade dealings? How much will the global economy slow? How much market share might Amazon capture with its delivery initiative?) are keeping rebound efforts in check.
There will be clarity of the unknowns in due time, but at 10.9x estimated fiscal 2020 earnings, it's fair to say a lot of disappointing outcomes appear to have been priced into the stock.
An escalation of the trade tension with China, and/or the onset of a recession, would be further drags, but absent those developments, long-term value is availing itself in this leading delivery logistics company, which is trading approximately at a 23% discount to its 5-year average forward twelve-month P/E ratio.