On Wednesday evening, FedEx (FDX) released the firm's fiscal third quarter financial results.
For the three month period ended February 28th, FedEx posted an adjusted EPS of $3.41 (GAAP: $3.05) on revenue of $22.169B. The bottom line print (adjusted) easily beat Wall Street's expectations, while the revenue number not only fell short of consensus view, but also showed a year over year contraction of 5.9%.
Looking a little deeper, on a GAAP basis, the firm produced operating income of $1.042B (-21.4%) on an operating margin of 4.7% (down from 5.3%) after operating expenses contracted 5.3% to $21.127B. This taxes and other expenses left net income at $771M (-30.6%) and took GAAP EPS down to the $3.05 that you saw above from $4.20 for the year ago comp.
The lion's share of the adjustments taken were made for business realignment costs.
Guidance
First off, FedEx is unable to forecast its fiscal 2023 mark to market retirement plan adjustments. As a result, the firm is unable to provide a fiscal 2023 effective tax rate or earnings per share result on a GAAP basis.
That said, for the full fiscal year 2023, which culminates at the conclusion of the current quarter, FedEx now sees EPS of $13.80 to $14.40 before the retirement plan related adjustments. This is well above prior guidance of $12.50 to $13.50 and also well above the $13.55 to $13.60 that Wall Street had in mind. The firm sees EPS of $14.60 to $15.20 before that retirement plan adjustment and excluding costs related to its ongoing business realignment plans. This is up from prior guidance of $13.00 to $14.00.
Fundamentals
For the nine months ended February 28th, FedEx drove operating cash flow of $5.401B (-14.7%). Out of this comes capital expenditures of $4.42B (up small). This put free cash flow at $981M (-49.7%). Out of that, the firm paid $888M in dividends and purchased $1.5B worth of Treasury stock. Obviously spending more on dividends and repurchases over nine months than one creates in free cash flow is a sub-optimal situation.
Turning to the balance sheet, FedEx ended the reporting period of $5.373B and current assets of $17.944B. That stands against current liabilities that add up to $13.58B, leaving the firm with a current ratio of 1.32. That is healthy, but beware... this is down from 1.43 at the end of the comparable period one year ago.
Total assets amount to $85.775B. Of that, the firm claims $6.455B in goodwill. At 7.5% of total assets, this is no problem at all. Total liabilities less equity comes to $61.042B including $20.122B in long-term debt. While I would prefer to see this debt to cash ratio improved upon, this does not turn this balance sheet into anything terrible. I would not call it fortress-like, but it does pass muster.
Wall Street
I have come across 11 sell-side analysts that have both opined on FDX since last night and are rated at four stars or better by TipRanks. After allowing for changes, across these 11, there are six "buy" and buy-equivalent ratings and five "hold" or hold-equivalent ratings. One of the holds did not set a target price, leaving us with 10 targets to work with.
The average target price across the remaining 10 analysts is $262.10 with a high of $305 (Ken Hoexter of Bank of America) and a low of $225 (Bascome Majors of Susquehanna). Once omitting these two as potential outliers, the average target across the other eight drops slightly to $261.38. Because, you may have interest, the average target of the six "buys" is $281.33, while the average target of the four "holds" stands at $233.25.
My Thoughts
The stock was up huge in morning trading on the significantly improved guidance for full year profitability. Investors also like where the firm is headed on the implementation of its cost cutting plans. Last night CEO Raj Subramaniam stated, "We've continued to move with urgency to improve efficiency, and our cost actions are taking hold, driving an improved outlook for the current year."
CFO Michael Lentz added, "Our improved earnings outlook demonstrates confidence in our ability to execute while managing the continued global volume softness we are experiencing across the business."
There's only one thing I really hate here. Operating and free cash flows either have to be boosted dramatically, or the firm has to cut back on returns to shareholders. The stock trades at 14 times earnings, so Wall Street, even on this pop, does assign a discount to these shares versus the broader market. Even key competitor United Parcel Service (UPS) trades at 16 times forward looking earnings.
On the bright side the stock has just broken through a $217 pivot created by an August through the present "cup with handle" pattern. My problem is that the stock created an unfilled gap in doing so. The stock created a gap that filled in early February and the stock created a gap that filled back in September.
We like to say that gaps usually fill, but with this stock... gaps usually fill in relatively real-time. I think I would rather short this "pop" in FDX than buy it after having missed the move. I am not so bold as to short the equity in this environment however.
I think the more risk-averse way to play this move bearishly might be to get long June 16th $220 puts for about $12.10 and sell a like amount of June 16th $210 puts for roughly $8.70. The net debit comes to $3.40, with the intent to win back $10 for a max net profit of $6.60.
(UPS is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells this stock? Learn more now.)
