Shares of FedEx Corporation (FDX.US) tumbled sharply recently after the company warned that third quarter results are likely to be worse than expected. During extended trading hours (pre-market benchmark), FDX shares lost as much as 22%.

FedEx’s weak preliminary results come at a very difficult time for stocks, further highlighting the possibility of a serious contraction in earnings per share, which the market may not yet have priced in.

It is possible that after the drop, FedEx stock will trade more closely to its fundamental valuation and offer a balanced risk/reward ratio for investors.

However, it is important that investors stay away from the retail and distribution sector because these types of signals discount that the worst is yet to come.

Since the global economy and investor sentiment remain very weak. And despite the fact that we see companies like Apple (APPL.US) at only 10% from ATH, following the example of Apple, the new launches have left a bittersweet taste that could translate into further setbacks.

Also in the case of Amazon (AMZN.US), still trading 30% below its all-time highs, reported in its latest earnings release at the end of July that its inventories are full to meet demand.

A demand that could begin to suffer more directly from the rising cost of living, both due to inflationary pressure and the increase in interest rates. Making the company founded by Jeff Bezon have to rely more on its cloud segment (AWS) to compensate for possible deterioration in the core business.

Preliminary results

Based on the preliminary result, FedEx expects a revenue shortfall of $500 million ($23.2 billion vs. analyst consensus of $23.7 billion). Additionally, the company expects earnings per share of $3.33, which is down 19% year-on-year and down $1.81 from consensus estimates of $5.14.

Source: FedEx press release

Weak guidance for the end of the year

FedEx also offered weak guidance for the coming quarter, expecting macroeconomic conditions to deteriorate further. Revenue is expected to fall between $23.5bn and $24bn with profit estimated at $2.65. In particular, the consensus of analysts had anchored expectations at $24.9 billion for revenue and $5.39 for profit. FedEx will officially release third quarter results on September 22, this coming Thursday.

Measures to manage headwinds

In response to the weak quarter, FedEx Management said it will freeze hiring, close around 90 FedEx locations and temporarily reduce business activity based on demand (reduce flights, park planes, etc.). The company also said it would cut capital spending for fiscal 2023 by about $500 million, down to $6.3 billion.

Is this drop a buying opportunity?

Supported by strong growth in e-commerce, FedEx has enjoyed an attractive structural tailwind in recent years. Specifically, from fiscal year 2019 to fiscal year 2022, the company’s revenue increased at a 3-year compound annual growth rate (CAGR) of approximately 10%, from $69.7 billion to $93.5 billion. During the same period, EBITDA increased from $8.6 to $13.9 and net income from $4.1 billion to $5.5 billion, respectively.

Consequently, those investors who have their eye on the company might be tempted to view the current price weakness as a buying opportunity and argue „being greedy when others are scared”. For reference, FDX shares are down 38% YTD, versus a nearly 20% loss for the S&P 500 (SPX).

However, despite the current situation there are no indications that FedEx is cheap. In fact, the recent drop may have put FedEx in its place, which is now trading more or less in line with a fair valuation.

It is true that the company’s historical average annual P/E of around 15x (Source Bloomberg) is about 15% higher than the company’s current one-year P/E of around 12x. But investors should note that analyst estimates for FedEx’s 2023 results are pending incorporation of the EPS estimate, which should bring the implied P/E closer to the company’s historical relationship.

What implications does the profit warning have?

Although the distribution business is positive and therefore favorable for FedEx in the long run, as e-commerce and express delivery services will continue to take a share of consumer disposable income, we should be cautious about the outlook. short term.

Investors should consider that the transportation industry is highly sensitive to macroeconomics. And the macroeconomy is clearly under pressure, with high inflation, rising interest rates, falling asset prices and a challenging backdrop for China and Europe.

As a consequence, FedEx is exposed to significant margin pressure. Reflecting slowing consumer sentiment and compression in freight rates, FedEx’s higher valuations will inevitably tend to correct. At the same time, inflation and higher fuel costs increase the cost of the business and will therefore reduce the profitability of the business.

Outlook for investors

FedEx’s „profit warning” is a very negative penalty for investor confidence in the US and global economy and comes at a very unfortunate time, shortly after the August CPI data that destroyed risk sentiment.

The signs of a recession are now too obvious to ignore. And, consequently, investors should avoid investing in companies that are very sensitive to the strength and weakness of the macro economy, such as FedEx, Amazon or Apple, among many others. In other words: this is not the time to „buy the dip”.

Technical analysis

FedEx shares are trading in line with pre-pandemic prices, with the $150 per share environment acting as a support zone. However, although the share has fallen sharply in a few sessions and on September 22 we will know the final results, it does not mean that the company has found the bottom of the market.

Source: xStation

In fact, it is likely that given the tightening of macroeconomic measures to fight inflation, both the distribution sector and many companies in the retail sector will suffer further sharp corrections in the coming months.