Inflation Puts A Dent In The FedEx Earnings Outlook
FedEx Corporation's (NYSE:FDX) earnings foreshadow a weak S&P 500 Q3 earnings season. It's still many weeks before the peak of the third-quarter earnings season but this week has been a pivotal moment for the market. FedEx, and S&P 500 peer, Lennar (NYSE:LEN), both reported strong results that are overshadowed by the impact of inflation.
Not only is inflation boosting the top-line results but it is cutting into the bottom-line results and outlook and that is very bad for the market. With earnings expectations in decline, investors need to prepare for a big decline in shares of FedEx and the S&P 500.
“First-quarter operating results were negatively affected by an estimated $450 million year over year increase in costs due to a constrained labor market which impacted labor availability, resulting in network inefficiencies, higher wage rates, and increased purchased transportation expenses … In addition, while commercial ground and U.S. domestic express package volume increased year over year, continued supply chain disruptions have slowed U.S. domestic parcel demand compared to the company’s earlier forecast.”
FedEx: The Double-Edged Sword Of High Demand
FedEx had a mostly good quarter supported by robust demand in all segments. The company produced $22 billion in consolidated revenue which is good for a gain of 14% over last year. The revenue beat consensus by 65 basis points which raises the first red flag for investors. The market is expecting—or rather needs—the average S&P 500 company to soundly beat its consensus estimates in order to keep rallying.
Sixty-five basis points are better than expected but not by enough to really alter the outlook. On a segment basis, results in the ground segment fell versus the prior year as COVID-related tailwinds subside and new headwinds emerge. Results in the commercial segment improved on company efforts to boost profitability enacted in previous years. In both cases, results were impacted by labor shortages that show no signs of ending.
The really bad news however is in regards to the company's profitability. Labor shortages are resulting in higher costs and cutting deeply into the margins. The company reported an adjusted operating margin of only 6.8% compared to 8.2% last year and an expectation for margin expansion. This resulted not only in weaker-than-expected earnings but led the company to reduce its guidance as well. As for earnings, the GAAP $4.09 missed the consensus by $0.78 while the adjusted $4.37 missed the consensus mark by $0.55.
Turning to the guidance, the company did not give guidance for revenue and provides several numbers to look at, but the news is not good. In all three comparisons, the company is guiding earnings outlook lower with noticeable weakness at the low end of the range. The company is expecting adjusted earnings in the range of $18.25 to $19.50 versus the prior guidance of $18.90 to $19.90 in one comparison. This is a decrease of 2% at the high end and 3.5% at the low end which opens the door to even weaker earnings in our opinion. And this guidance includes the expectations for rate hikes in the range of 5.9% the 7.9% across the operating network.
The Technical Outlook: FedEx Falls To Key Support
At time of writing, shares of FedEx were down more than 6% in premarket action following the release of Q1 earnings. The move has the appearance of a market capitulation but there is a risk of a bigger decline. Pre-market action is indicated to open just above the key resistance level of $236 and may fall below that level once the market opens. If price action moves below $236 and closes there, this market could be in for another 27% decline. If, however, price action maintains support at or near this level, we would expect to see FedEx trend sideways over the next quarter or two.
