This morning FedEx (FDX) reported earnings that were generally weaker than analysts were expecting (press release available here). In the quarter, earnings were $1.57 on $11.4 billion in sales, and analysts were looking for $1.64 and $11.44 billion in sales. Nonetheless, results were better than a year ago with sales up 3% and earnings up 4% from last year's adjusted $1.50 in EPS. Even though this quarter was a bit disappointing, the company did boost full year guidance to 8-14% EPS growth from 7-13% EPS growth. Analysts have already been expecting 12% EPS growth this year, so this bump in guidance is unlikely to change expectations. Given the shares' run this year, was this quarter good enough to merit buying FDX?
After this quarter, I continue to be concerned about FedEx Express, which really continues to struggle. Consumers seem content to go for slower ground options, which generate less revenue. For many years, a major component of competition in the shipping business was speed, and we seem to be shifting away from that. Express was down again year over year from $6.86 to $6.84 billion. Express is the main driver of the business, and unless it returns to growth, FDX will struggle to grow revenue over the long term.
To offset declines in the domestic express business, FDX has focused on expanding to international markets to boost revenue. Unfortunately, we are seeing the same trend overseas that we are seeing in the United States. International Economy daily volume jumped 10%, which is pretty solid. On the other hand, International Priority saw daily volume fall 5%. At the end of the day, the company is much better off if Priority grows rather than Economy because the company can charge more for these packages. Unfortunately, consumers and businesses continue to shift towards cheaper options, which is a major headwind for the company.
Fortunately, the company's cheaper alternatives have been performing well with daily volume at Ground up 8% and Freight up 4%. While it seems that FedEx is gaining some share in these markets, FedEx is likely cannibalizing itself. In other words, customers who used to ship FedEx Express are now shipping FedEx Ground. In this situation, Ground looks strong and Express weak, but overall, the company is slightly worse off as these cheaper options are not the ones the company wants customers taking.
Businesses and consumers are increasingly cost sensitive and if a package does not have to arrive for a few days will use a cheaper alternative. As the shipping market returns to a point where price rather than speed becomes the major driver of competition, I am concerned that FedEx could see increasing pricing pressure and declining margins alongside UPS (UPS). Until FedEx can start to grow its premium services, revenue is likely to grow slowly in the 0-3% range, and EPS growth will be driven by cost cutting and share buybacks rather than a growing topline.
In this environment, I do think FedEx shares are overpriced even with analysts looking for 12% EPS growth in 2014. With $7 in 2014 earnings, shares are trading at 19.86x, which is especially expensive for a company whose fate is so closely tied to economic growth. With shifts towards lower end products, I believe FedEx will be facing decelerating growth over the next three years. After a 50% 2013 rally, I think shares have moved enough, and this quarter does not merit such a high earnings multiple. Even if shares fell 10% to $126, they would still trade at a pretty pricey 18x earnings. At 20x, FedEx is a sell, and I would not be interested in buying unless shares fell below $120.