Shares of Fedex Corporation (NYSE: FDX) are up more than 5% the day after the company surprised investors with a hit on the bottom line. The company’s $3.18 earnings per share (EPS) was more than 12% higher than analysts’ expectations for earnings per share of $2.82.
That’s the good news. The bad news is that the drop in profit was due to cost-cutting measures. There is nothing wrong with companies taking such actions, especially as the world heads into recession. And FedEx says it has “found” $1 billion in additional cost savings (most likely from its overbuilt land operations) to bolster earnings in future quarters.
But companies can only play defense for so long. At some point, FedEx will miss out on revenue if it can’t strengthen its revenue base. And that’s a story investors can see from the FedEx stock chart.
A pattern emerges
FDX stock showed a downward trend ahead of its second-quarter fiscal 2023 earnings report on expectations of a miss. So the fact that the company scored a beat is a bit of holiday cheer. This has been a trend for FedEx for the past two years. The stock rises after Q2 earnings and falls shortly after.
For the past 18 months, however, the stock has been in a bearish pattern of lower highs and lower lows. And that’s the story investors should keep a close eye on. The recent increase may allow for profitable trading, but it is not a buy signal for long-term investors.
Demand is weakening
FedEx warns of lower demand since last earnings report. This has become a familiar pattern for companies trying to lower the bar to climb over it. But in the case of FedEx, it has more grip.
It was only natural that demand would slow down after 2020. As the economy picked up again, demand for e-commerce would undoubtedly come off an all-time high. But when a company like FedEx says demand slows down after that Amazon Inc. (NASDAQ:AMZN) also warned of lower demand, investors would be wise to take note.
Still, before this earnings report, the company managed to beat its annualized revenue projections (YOY). However, the same cannot be said of the company’s profits. This is the second consecutive quarter that FedEx has lost revenue on an annualized basis. That only fuels investor expectations of an earnings recession in 2023.
A whistleblower for the markets?
I don’t know if it’s fair to say that FDX stock is a barometer for the broader market. Part of the economic growth last year shifted from goods to services. So it might be more accurate to say that FedEx is a barometer of consumer confidence.
Heading into 2023, consumers are pulling back their discretionary spending. It will likely stay that way as long as the Federal Reserve raises interest rates.
To that end, many companies are trying to get ahead of the bad news by lowering earnings expectations. While this has the predictable effect of lowering stock prices, investors are discovering that stocks will not recover if companies live up to their lower expectations.
FDX stock is a hold
Analysts followed by MarketBeat continue to give FDX stock a price target of $203.92, which is a 19.5% gain from its current price. But analysts quickly issued price targets after the earnings report, and reviews have been mixed.
There is a path for FDX stock to move higher. A reopening in China would help. And the company may be able to execute on its cost-cutting strategy to keep earnings in line with expectations. But without a significant dividend, the company will have to show shareholders how it plans to perform for them.
FedEx is part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.