FedEx Stock Plunge: Another Reason to Fear a Recession Is Coming – JB Hunt Transport Servs (NASDAQ:JBHT), FedEx (NYSE:FDX)

FedEx Corporation FDX FedEx is a solid business, but its latest results give another reason to fear a recession is coming. The company underperformed across all metrics, contracting against an expectation of growth and cutting guidance in what may be the first of several reductions this year. The FedEx news sent fear waves throughout the transportation sector, boosting the stock prices of competitors like United Parcel Service and JB Hunt Transportation Services JBHT below.

The bottom line is that the third-quarter earnings season will be disappointing, and there are economic concerns as well. FedEx and other transportation giants are leading indicators of the economy, but FedEx did not grow this quarter. Upcoming data may reflect weakness, which will not benefit the broader stock market.

Habit changes offset FedEx's quality improvements

FedEx had a strong quarter financially, generating enough revenue and earnings to sustain operations and the capital return program. However, net income of $21.16 billion was 40 basis points below last year and 140 basis points below consensus estimates, and margin contraction weighed on the bottom line.

The revenue weakness is attributed to a shift in product mix, as consumers moved away from higher-cost and higher-margin priority shipments in favor of lower-cost and lower-margin options. Both operating segments contributed to the weakness, and there was one fewer day in the quarter. Still, when adjusted for day, the results are still far from consensus and come with weak and potentially upbeat guidance.

Margin news is mixed. The company reports further progress on its DRIVE initiative and improved structural quality. However, the shift in consumer trends also impacted margins, which contracted compared to last year, amplified by rising payroll expenses. Operating margin is down 180 basis points on a GAAP basis and 170 basis points on an adjusted basis, leaving net income down 23% and adjusted EPS down 20%. Adjusted EPS is helped by share repurchases, which have accelerated this year. The company repurchased $1 billion in the first quarter, impacting EPS by $0.03, and is forecasting another $1.5 billion in repurchases by year-end.

The forecasts are not great, but they could be better. Revenue and earnings are sufficient to maintain operational and balance sheet quality, and revenue is expected to grow through year-end, but reflecting lower demand and the shift in consumer trends in the first quarter. The bottom line is that the revenue target was cut from mid-single digits to low single digits, and earnings were cut at the high end, and both are likely to be optimistic. There is little expectation that economic headwinds will improve in the third and fourth quarters, and it will be several quarters before the FOMC rate cuts have an impact.

Analysts limit FedEx stock gains, expect downward pressure in Q4

Analysts are not pleased with FedEx's results and are lowering their price targets following the release. MarketBeat tracks more than a dozen revisions during the first day of the report, including numerous price target reductions and several downgrades. Their activity causes the price target consensus to move lower and limit upside potential at the top end of a trading range. However, the negativity is offset by a single price target increase, and the consensus is that the stock remains a buy with a chance of returning to the top of the range, assuming subsequent reports are more favorable.

FedEx price action confirms resistance at the top of the trading range. The market fell 15% after the report, showing strong resistance to higher prices at that level, and is likely to continue lower over the next few weeks. The best target for firm support is near the $235 level, which may be reached soon. The risk is that market sentiment continues to deteriorate and FDX stock falls out of its range and moves to the $200 level or lower. The opportunity for investors is to put this stock on a watch list and wait for it to bottom out. That will come in line with a brighter economic outlook.

The article “FedEx stock plunges: another reason to fear a recession is coming” first appeared on MarketBeat.