It’s easy to be bullish on a stock that’s doing well. Everyone queues up to take a bit of the pie. It’s a lot tougher to do the same when a stock has taken a few hits.
However, it is precisely at this time that value investors get out their magnifying glasses and hunt for diamonds in the rough. This kind of investor looks for great companies that are facing short-term challenges but have the experience and expertise to come through it.
FedEx (FDX) is one such stock that has been battered in 2021 so far but should bounce back in a strong way. We’re bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Why is FedEx Facing Headwinds?
FDX stock opened 2021 at $260.40. It hit $319.90 in May before falling back down in the fall to around $245. The company reported its Q1 Fiscal Year 2022 earnings for the period ended August 31, 2021 in September.
While revenue numbers were decent, the stock missed analyst estimates when it came to EPS. The company reported an EPS of $4.37 while analysts expected it to be around $4.91.
The company is facing a severe labour shortage and supply chain problems. This is not unique to FedEx but the company hasn’t addressed it in the best possible manner. The company was candid enough to admit that these issues wouldn’t go away anytime soon.
“The impact of constrained labor markets remains the biggest issue facing our business as with many other companies around the world and was the key driver of our lower-than-expected results in the first quarter,” said Rajesh Subramaniam, FedEx COO.
He added, “we estimate that the impact of labor shortages on our quarterly results was approximately $450 million, primarily at FedEx Ground. Labor shortages had two distinct impacts on our business. The competition for talent, particularly for our frontline workers, has driven wage rates higher and pay premiums higher. While wage rates are higher, the more significant impact is the widespread inefficiencies in our operation from constrained labor markets.”
FedEx has said that it needs to hire 90,000 workers to be able to meet peak demand but it is struggling to do so.
The company also said that a hike in prices is on the cards. It had announced earlier. “…effective January 3, 2022, FedEx Express, FedEx Ground and FedEx Home Delivery shipping rates will increase by an average of 5.9%, while FedEx Freight rates will increase by an average of 5.9% to 7.9%.”
A fuel surcharge increase has been applied to FedEx Express since November 1.
Can FDX Turn Around?
The package delivery market in the US is pretty much controlled between FedEx and UPS (UPS). FDX stock seems to have bottomed out in October when it went down to $216 levels. It has recovered and is building a base around the $240 level.
The next move will likely be upwards. This is based on the fact that while the company is facing a labor shortage, it is not facing a problem of consumer demand which would be a lot harder to solve.
FedEx has said that it expects the U.S. domestic market volume to increase at 10% though 2026. It sees a huge market in air cargo. It forecasts this market to grow to more than $80 billion by calendar year 2025.
The company presently has a single-digit market share. It believes “this remains a significant growth opportunity for us to continue to pursue.” It added that while its air cargo volume has dropped, it will likely recover to full capacity by 2024.
It’s focusing heavily on Europe when it comes to air cargo. It already has a major presence there after its acquisition of TNT Express in Netherlands, the world’s fourth largest parcel-delivery provider.
The company said it expects headwinds in the $800-million range for Q2 2022. It also forecasted revenues of $90 billion for Fiscal Year 2022. It also forecasted that the U.S. parcel market would grow to “101 million packages a day by calendar year 2022, which is year-over-year growth of 12%.”
FedEx ended Q1 with $7 billion in cash and is targeting over $3 billion in adjusted free cash flow for Fiscal Year 2022 which will mean it has delivered $7.5 billion in adjusted free cash flow for Fiscal Years 2021 and 2022 combined, beating historical levels.
The company has made investments to handle its supply chain constraints. It is strategically investing in its “…network to boost daily package volume capacity, increase efficiencies and further enhance the speed and service capabilities of our networks. As e-commerce drives higher demand.”
Wall Street’s Take
TipRanks’ Stock Forecast Tool indicates 17 out of 21 analysts have given FDX a Buy rating, while four analysts have a Hold rating on the stock.
The average FDX price target is $304.65, which indicates 25.1% upside potential.
Bottom Line
The stock price has taken a beating in the last two quarters. There’s no denying that. However, it is a matter of time before the stock price starts bouncing back.
Disclosure: At the time of publication, Hashtag Investing did not have a position in any of the securities mentioned in this article.
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