FedEx Earnings: Don’t Buy the Hype

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On Wednesday, shares of FedEx (NYSE:FDX) soared as the company reported earnings and forward guidance. The stock was up about $9 to $149 per share. The company beat analyst expectations on the earnings front, reporting $2.46 per share versus an estimated $2.35 per share estimate. This is compared with earnings of just 95 cents per share in the same period a year ago.

Furthermore, the company released positive guidance figures, as the company expects the economy to grow by 3.1percent next year, and management believes that this will help push earnings higher. However, I think this is a great selling opportunity for FedEx investors, and there are several reasons for this.

First, while the company’s profits soared, its revenue rose by just 3.5 percent. While an increase in revenue is certainly a positive, the discrepancy between revenue growth and sales growth points to the fact that sales growth cannot continue at the current pace and that it will ultimately converge with earnings growth.

Second, revenue growth is decelerating. Revenue growth from 2012 to 2013 was 3.7 percent, and it was 8.7 percent in the previous year. Thus, while we may see growth in the next couple of quarters, the company’s forecast of higher growth is a countertrend assumption, and it has no basis in anything other than a statement from management that it believes the economy will grow faster in 2015.

Third, the price of oil is rising. The price of oil is over $106 per bbl. and it has been trending upwards. This means that FedEx’s input costs will rise substantially, as it is primarily a shipping company, and this will eat into profit margins. While the company introduced a new pricing structure clearly aimed at combating this, this will only serve to increase shipping costs to businesses that need this service, and this will put pressure on the economy — especially since rival UPS (NYSE:UPS) did this, as well.

Fourth, keep in mind that earnings are backward looking. I think a large part of the price rise today is a result of the company’s guidance. This guidance is, in my mind, overly optimistic because it assumes strong economic growth next year, when various indicators (GDP figures, retail sales, consumer spending, inflation, and so on) and think tanks (the World Bank, the Federal Reserve) all suggest that growth is slowing. While many people suggest that the global economy will turn around, this has yet to be seen.

Fifth, FedEx trades at a relatively high valuation at well over 20 times earnings. This is expensive for a stock despite the fact that we have gotten used to such valuations. Historically, stocks have traded at around 12-15 times earnings while they have been long-term “buys” at 10 times earnings or lower. When you buy or hold onto a stock that trades at a valuation as high as FedEx’s, you should expect a minimal return on your investment — less than 5 percent per year compounded — over the next decade. This issue is worse with a company such as FedEx, considering that it hardly pays any dividend: 80 cents per year annualized, or just more than 0.5 percent.

Given these points and given that market sentiment is extremely optimistic, now is a great time to sell FedEx shares.

Disclosure: Ben Kramer-Miller has no position in FedEx or in UPS.

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