Will FedEx Continue to Fall?

FedEx (FDX 0.38%) can't seem to get a win. Dropping Amazon (AMZN -2.42%) as a customer, a slowing global economy, increased trade tensions, and a poorly timed acquisition have placed the company in a tough position.

Lowering forecasts for 2020 have scared investors off to the tune of a 40% drop in its share price from its 52-week high of $243 per share. Investors facing a steep share loss are wondering if all the bad news has washed the stock out -- leaving behind a potential value play.

Lowered forecasts

Revenue of $17.05 billion was announced from the first-quarter earnings release against an expected $17.06 billion. In addition, earnings per share of $3.05 came in lower than expected from an estimated $3.15. To make matters worse, management lowered guidance for 2020 with a revised estimate of $10 to $12 per share and an expected 2020 cost increase of 4.9%. There isn't much to get excited about from the recent earnings release.

Dropping Amazon

In August, FedEx announced that it will no longer deliver packages for Amazon, as Amazon is building its own delivery service -- becoming a direct competitor. Sidestepping the largest e-commerce company in the world, FedEx plans to fill the lost volume with higher profit margin customers. The decision to drop Amazon was a strategic decision, focusing on risk and sustainability in the long-term.

Projected revenues from Amazon were 1.3% at the end of 2018. After assuming a lower profit margin, the impact from the decision wasn't the gamechanger for FedEx that investors assumed it would be. Amazon is scaling quickly and FedEx would have been forced to invest to keep pace with the demand, which would result in a high-risk scenario. As Amazon is building a competitive infrastructure, any investment would have been lost if Amazon decided to walk away from external shippers and rely solely on internal assets.

TNT is blowing up

In 2016, FedEx acquired Netherlands based TNT Express for $4.8 billion, the world's largest air express network and European road network to push against the largest rival, UPS (UPS 0.62%). FedEx had an original cost estimate behind the integration of $700 million, however, costs are starting to reach $1.5 billion per the recent quarter announcement of an additional $100 million on top of the outstanding spend of $1.4 billion from the date of acquisition.

In addition, there is a class action lawsuit brought by shareholders against FedEx regarding the way FedEx handled the cyberattack on TNT in December of 2017. The lawsuit states that FedEx management remained optimistic about the issue while the attack crippled operations and destroyed share value. The cyberattack took place in the middle of the integration into FedEx's infrastructure. The acquisition looks to be a large problem for FedEx, one that management will have to spend their way out of.

IMAGE SOURCE: GETTY IMAGES

The sky isn't falling

After taking the bad news into account, there is a massive opportunity at hand -- the continuing growth of e-commerce. Global e-commerce transactions are projected to grow at a rate of 20% CAGR into 2022, with a target spend of $5.8 trillion, according to a research report by 451 Research. The size of this opportunity isn't small, as 2018 global e-commerce spending was estimated at $2.86 trillion.

Comparing price to earnings between two companies is only useful when the companies operate under the same industry and have similar business models. UPS is the closest business next to FedEx to determine value in the same industry because its revenue growth, gross margin, and capital spending are similar. Looking at the forward price-to-earnings ratio, FedEx is a better value at 12.13, while UPS has a forward P/E of 15.59.

FedEx has taken a beating, however, there is value for opportunistic shareholders wanting to take on marginal risk for a potentially big reward down the road. As global e-commerce spending continues to grow, the rising tide will lift all boats, FedEx being one of the largest to benefit.