Will Q4 Earnings Be A Dampener For FedEx (FDX) Stock?

Memphis, TN-based FedEx Corporation (NYSE:FDX) is scheduled to report fourth-quarter fiscal 2016 earnings results on Jun 21, after market close.

In the third quarter, FedEx had reported better-than-expected earnings. However, the company’s bottom line might take a hit in the fourth quarter from the escalated costs.

Our model too does not hint at an earnings beat in the first quarter. Here’s why:

The possibility of FedEx beating the Zacks Consensus Estimate in the fourth quarter is rather low. This is because it lacks the right combination of the two key ingredients – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – that reflects the possibility of an earnings beat.

Zacks ESP: Earnings ESP for FedEx is -1.84%. This is because the Most Accurate estimate is 6 cents lower than the Zacks Consensus Estimate of $3.27 per share.

Zacks Rank: FedEx has a Zacks Rank #3 (Hold). However, that alone is not enough to secure an earnings beat.

Also, we caution against Sell-rated stocks going into an earnings announcement, especially if the company has seen negative estimate revisions.

Likely Factors at Play

FedEx has a mixed track record with respect to earnings. The company delivered positive earnings surprises in two of the last four quarters, with an average beat of 2.05%.

Last month, FedEx completed the acquisition of TNT Express for €4.4 billion. The buyout has significantly expanded FedEx’s scale of operations, particularly in Europe. Following the completion of the deal, FedEx has strengthened its position in the lucrative e-commerce business. The expansion of its capabilities has enabled FedEx to compete more effectively with rival United Parcel Service Inc. (NYSE:UPS) that has a substantial European presence.

Investors will keenly await updates on the integration process of the merger. We expect costs associated with deal to hurt FedEx’s earnings in the fourth quarter. Moreover, FedEx's freight unit performed disappointingly in the third quarter of fiscal 2016 with segmental operating income declining 16% from the year-ago figure. Focus will also be on the performance of the segment in the fourth quarter.

We are however encouraged by the company’s focus on share buybacks and regular dividend payments to enhance shareholders’ value. An update on the issue is expected during the fourth quarter conference call. We also expect the company to disclose its guidance for fiscal 2017 at the conference call. With so much to look forward to, we expect investor focus to remain on this key transportation player’s results.

Stocks That Warrant a Look

Here are a few transportation stocks that you may want to consider, as our model shows that these have the right combination for an earnings beat this quarter:

Kansas City Southern (NYSE:KSU) has a Zacks Rank #3 and an Earnings ESP of +0.92%.

Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (NYSE:PAC) sports a Zacks Rank #1 and an Earnings ESP of +5.88%.