Top FedEx Corp. (NYSE:FDX) executives met with securities analysts yesterday in an effort to convince them the issues that led to mid-December’s mediocre fiscal second quarter results and downbeat fiscal 2019 outlook were being rapidly addressed. For their part, analysts caught off-guard by the company’s disappointing forecast appear willing to give it the benefit of the doubt.
The meeting, held at FedEx’s Memphis headquarters, had been scheduled back in October. But the events of the past three weeks lent it greater resonance and urgency than could have been expected. The group came armed with a list of concerns ranging from the core worry--how quickly FedEx could turn around its troubled TNT Express unit--to demanding, in the name of greater transparency, they be allowed to verbally pose questions on the quarterly calls rather than submit them only via e-mail. Five members of the company’s upper management echelon were on hand, with one notable exception: Chairman and CEO Fred Smith, who was believed to be meeting with mutual fund managers elsewhere in the building.
At the meeting, Brie Carere, FedEx’s new chief marketing officer, confirmed the company will enter the home delivery market for large and heavy goods. According to analysts, Carere said FedEx successfully beta-tested the product, through its FedEx Freight less-than-truckload unit, in six U.S. markets over the holidays. Executives wouldn’t give a timeline for a broad rollout. However, Bascome Majors, analyst at Susquehanna Financial Group, surmised in a note that the company would “scale this effort rapidly.” FedEx’s strong exposure to the retail and e-commerce customer segment, combined with FedEx Freight’s cross-dock network, “should instantly offer a credible solution for customers” in a segment currently dominated by XPO Logistics Inc. (NYSE:XPO) and J.B. Hunt Transport Services, Inc., (NASDAQ:JBHT) Majors wrote. Hunt announced yesterday that it had acquired Cory 1st Choice Home Delivery for $100 million to penetrate the last-mile segment for furniture deliveries.
FedEx blamed the subpar results and weak outlook on a confluence of factors, among them a dramatically slowing European economy which hampered TNT Express’ business, the mid-2017 “NotPetya” cyber-attack on TNT Express systems, a less-profitable mix at the unit that was weighted towards heavier-weighted traffic and away from higher-margin express business, and the effects of the U.S-China trade war which led to a slowing in trans-Pacific business and shipping activity; Apple Inc., (NASDAQ:AAPL) for example, is one of FedEx’s largest customers.
At the meeting, executives vowed to take fast action to fix TNT Express. However, only about 30 percent of the TNT Express business has been integrated, and most of that has involved smaller, less complex initiatives. Todd C. Fowler, analyst at KeyBanc Capital Markets, said the mix among TNT Express’ smaller customers remains “sub-optimal,” though it has regained lost share from most larger shippers. “Our impression is some temporary, manual network adjustments are taking place to provide improved service at a competitive cost, with further traction expected as additional countries are integrated in the coming quarters,” Fowler wrote.
The FedEx Ground and Freight operations continue to perform well, company executives told analysts. Ground volumes can double without the need for an additional hub to process the increased traffic, analysts were told. Ground margins should reach the mid-teen levels, and freight margins should rise to double-digit levels both by fiscal year 2020, wrote Amit Mehrotra, a Deutsche Bank analyst. LTL margins should expand as the cost of I.T. investments recedes and pricing strengthens to reflect the impact of stronger volumes, Mehrotra added. The ground and LTL divisions account for two-thirds of the company’s profits. The laggard is the company’s core Express unit, where TNT Express resides.
The FedEx executives avoided making hard-and-fast projections because the macroeconomic environment remains uncertain, the analysts noted. For example, executives would not offer guidance on when FedEx Express would achieve a $1.2 to $1.5 billion profit improvement over FY 2017 levels; the company said last month that it wouldn’t hit that target in FY 2020, which begins June 1. Executives also stated that future capital-investment plans remained under review.
The consensus among analysts at the meeting is that traders and investors have priced in all the bad news, and that valuations are so reasonable that the company’s board should strongly consider repurchasing its stock. According to Fowler, the company has 6.3 million shares, or about 2 to 3 percent of its existing float, authorized for repurchase.
Mehrotra said FedEx shares trade at single-digit multiples and sit at their largest discount to the S&P 500 in its history. After taking a $23 a share drubbing on Dec. 19, the first trading day after posting the results, the share price drifted down to a 52-week intra-day low of $150.94 the day after Christmas. Shares have risen nearly $20 since then.
As for the push towards greater investor transparency, FedEx will restore its traditional practice on its next quarterly call of allowing analysts to pose questions by phone.
(The story was updated to include the correct range of projected profit improvement at FedEx Express)