Is 10% earnings contraction on 14% revenue growth good? Asking for a friend. FedEx (FDX) reported the firm's fiscal first quarter performance on Tuesday evening. The firm posted adjusted EPS of $4.37, badly missing expectations of more than half a buck higher. GAAP EPS of $4.09 missed by almost $0.80. Revenues hit the tape at $22 billion, beating Wall Street by a rough $140 million, and good for the already mentioned growth of 14%. To be fair, the earnings contraction comes after sequential quarters coming in that boasted annual earnings growth prints of 60%, 92%, 146%, and 98%. The 14% revenue growth was also a deceleration, coming off of 23% and 30% growth the prior two quarters.
The firm made plain last night that ongoing tightness in labor markets is "the biggest issue facing our business", while mentioning that rising wages, and overtime rates padded an additional $450 million in expenses for the reporting period. To put it bluntly, from Q1 to Q1, revenue increased from $19.3 billion to $22 billion. Operating Income decreased from an adjusted $1.64 billion to $1.4 billion on an adjusted operating margin of 6.8%, down from 8.5%. Adjusted Net Income dropped from $1.28 billion to $1.19 billion.
It Gets Worse
The firm is unable to forecast full year fiscal 2022 GAAP EPS or an effective tax rate at this time. On an adjusted basis, FedEx sees full year EPS at $19.75 to $21 before MTM retirement plan accounting adjustments and excluding estimated TNT Express integration expenses as well as costs associated with business realignment activities. This is down from a prior adjusted forecast of $20.50 to $21.50.
What's obvious is that FedEx needs to raise prices. Fact is that the firm already announced that effective January 3rd, FedEx Express, FedEx Ground, and FedEx Home Delivery shipping rates will increase by an average of 5.9% to 7.9%. Is this "too little, too late?" Perhaps.
Thoughts So Far...
I am long FDX. I sold about two-thirds of my stake earlier this month. My instinct as a trader was to buy back on this dip what I had sold earlier. The more I dig in, the more I doubt my wisdom in hanging onto even the one-third of my position that I still have. I have found nothing to this point that would provoke increasing my long at this time. The 1.19% dividend yield doesn't exactly get my internal fire started. Competitor United Parcel Service (UPS) , also a long of mine, also one I have reduced, is down with what Jim Cramer refers to as the 'pin action.' Will UPS face the same pressures? Definitely. Will they manage the business a little better? They do have CEO Carol Tome at the helm, and they pay shareholders a little better (2.15%).
I can find eight five star rated (at TipRanks) analysts who have opined on FDX this morning. Six have maintained "buy" ratings or their firm's equivalent. One analyst maintained a "hold", while one (Raymond James) downgraded from buy to hold. While the average price target for the name for this group remains above $300, the majority of these analysts have reduced those targets. I think Citigroup's Christian Wetherbee said it best in his note, stating that FedEx has done a "particularly poor job" managing core cost inflation or its 9% cost growth ex-labor and unique items.
Needless to say that technically speaking, FDX is badly oversold. Relative Strength, the Full Stochastics Oscillator and the daily MACD all look like something out of a cheap monster movie. The stock now trades so far below the three key moving averages that I follow as to make mentioning them irrelevant.
One positive take-away would be the size of the gap created this morning and my belief that most gaps eventually fill. Then again, the stock also has an unfilled gap between $288 and $295 from back in July. The shares have also breached the central trendline of my Pitchfork with an extreme level of downside prejudice.
Technically, FDX is a buy here. I'm not feeling it. Something is wrong. Wronger than it should be. I am downgrading FDX to a "sell" and plan to exit the name. I will not exit on this Wednesday morning's FedEx puke-a-thon however. The algos will in my opinion try to fill that gap, or at least part of it. That's how they are programmed. They can't help it. This thing gets back into the high $230's, and I'm outta here.