Last night, shares of FedEx dived after reporting an earnings warning, which it blamed on weather and higher commodity costs.Our sense is that the thinking of “the street” right now is that the warning was expected, and really due to the weather.
FedEx (FDX.N) More Opportunity than Surprise in FQ3 Profit Warning
Anticipated FQ3 profit warning issued
In line with our expectation for a big FQ3 EPS miss by FedEx, the company issued a profit warning after Monday’s close, revising FQ3 EPS guidance to $0.70-0.90 from the prior range of $.0.95-1.15 (both excluding FedEx Freight restructuring costs). The new guidance includes a $0.25/share negative impact from severe winter storms and higher than expected fuel prices during the quarter, ending February 28.
A near-term headwind for the stock…
We think this profit warning is at least partly priced in already, with the stock underperforming recently as broker estimates started coming down. FDX fell 2% in the past month vs. the S&P 500 +3%, DJ Transportation Average flat, and UPS +4%. However, the new guidance range is likely somewhat worse than the market expected. FQ3 consensus EPS has drifted down from $1.09 to just $1.04, and even among only those analysts who recently lowered estimates, the a.verage revised estimate is $0.96. Thus, we may still see the stock retreat further following the profit warning.
…but a longer-term investment opportunity
We maintain our high conviction Buy rating on FDX. With the stock trading at only 15x our NTM EPS estimate, we’d regard any weakness stemming from the FQ3 profit warning—due to t.ransient impacts of weather and fuel—as a very compelling entry point…especially ahead of what we expect to be bullish guidance around fiscal 2012.