Will Q2 earnings deliver for FedEx stock?

FedEx [FDX] is expected to report a 12.4% year-over-year decline in earnings when it reports its second quarterly earnings on December 16. The company follows a financial year that ends on May 31.

Analysts at Zacks forecast that the transportation giant will report earnings per share of $4.23, down from the $4.83 seen a year ago. It is anticipated to report $22.53bn in revenue, a rise of 9.6% on the $20.6bn posted in the same period in 2020.

A combination of pandemic-driven disruption to global supply chains along with a need to raise salaries and overtime opportunities to attract drivers has hit FedEx in 2021. This follows a boom time for the company in 2020, when lockdowns and home working resulted in an unprecedented surge in online shopping and deliveries.

“After several negative catalysts in the parcel space, momentum has (modestly) reversed in recent weeks,” said Morgan Stanley equity analyst Ravi Shanker in a note to investors. FedEx has failed to beat EPS estimates twice in the last four quarters and Shanker expects a similar result this time. “We believe consensus and guidance are still too optimistic,” Shanker said. “We expect F2Q22 to come in below consensus. We are also below consensus for overall EBIT driven by misses in FedEx Ground and Express, [two of the company’s three business strands], which are only partially offset by a beat in Freight.”

Morgan Stanley believes the FY22 guidance cut from last quarter was not enough to compensate for the risk to Q2 ending 30 November and the current financial year’s earnings.

FedEx performing so far

The company’s Q1 results were impacted by $450m in increased costs resulting from a shortage of labour and higher transportation expenses, although the negative impact was partially offset by higher sales.

The pandemic rapidly accelerated trends already being seen in the e-commerce space, which has seen rising order volumes for a number of years. FedEx is therefore continuing pressing ahead confidently with plans to expand both its routes and delivery capacity. In 2019, it broadened its Ground deliveries to seven days a week, and in its June 2021 earnings release it reported that it had delivered 56% more packaged on a Sunday compared to the year-before quarter.

FedEx anticipates it will have delivered 100 million more packages between Black Friday and Christmas 2021 than in the same window in pre-pandemic 2019.

Looking forward, the company expects to continue generating solid growth, anticipating EBITDA to grow by 7.2% in 2022 and 10.8% in 2023, after growing by 48.1% in fiscal 2021. FedEx expects normalised EPS, which grew 91.3% in fiscal 2021, to grow by 7.9% in 2022 and 12.5% in 2023.

FedEx’s share price

Global supply chain issues have given the FedEx share price a bumpy ride over the last six months. Following a 21.2% rise between January and June 2021, which saw it hit a record closing price of $314.81 in May, it had plunged to $219.29 by the end of September. The share price has, however, rallied to $246.28 as of 10 December, as holiday shopping season has kicked in.

According to CNNMoney, analysts expect the climb to continue with a consensus rating of ‘buy’, held by 22 of 33 analysts. Two analysts have an ‘outperform’ rating and the remaining nine a hold. Twenty-seven analysts offering 12-month forecasts predict an average target price of $300.00 — a potential 22.7% upside on 9 December's closing price.

Morgan Stanley has a base target price of $250 with a high of $350 in a bull scenario and worst case of $125.

FedEx’s woes relating to the labour market and global supply chains may be accentuated by the resurgence of COVID-19 restrictions since the omicron variant made an appearance in November. Yet, the expected rise in demand for parcel deliveries that come with social restrictions could make up for this disruption.