FedEx stock is shooting higher on Wednesday after the shipping and logistics company’s latest quarterly results. Investors are right to be happy about its progress, but what is going on there doesn’t reflect much about the broader economy, despite the company’s bellwether status.
Shares of FedEx were up 15% in afternoon trading, bolstered not only by the company’s beat-and-raise fiscal fourth quarter, but also by its pledge to conduct a strategic review that could lead to a sale or spinoff of its less-than-truckload freight business. The stock’s move is a welcome change from the rest of the year, as FedEx has struggled near the break-even line.
Given that underperformance, it isn’t too late for investors to buy into the shares even after Wednesday’s pop. They trade for around 12 times forward earnings, just below their five-year average of 12.5 times. Analysts’ profit forecasts are likely to climb as the Street adjusts to FedEx’s new, rosier outlook for the fiscal year ahead.
“More consistency in execution, improving profitability, and thoughtful capital allocation are exactly what investors want, and FedEx is delivering,” wrote Baird analyst Garrett Holland. He reiterated an Outperform rating and raised his target for the stock price by $15 to $340 following the news.
It is the combination of strong results and a potential strategic shift that appears to be lifting the stock. The strategic review of the less-than-truckload business, which involves smaller shipments, typically over short distances, comes in response to shareholder pressure and “could unlock significant value,” as Bernstein’s David Vernon put it.
That’s because, he argues, a stand-alone freight business might have more opportunity to close the margin gap with its peers, while the remaining company could command a higher multiple too, as the benefits of its self-help initiatives become clearer. “The shift in positioning on this topic is notable and a clear sign that maybe, just maybe, things are changing in Memphis,” he wrote.
FedEx’s improved outlook is similarly heartening. Although some might see it as too aggressive, setting investors up for potential disappointment, J.P. Morgan analyst Brian Ossenbeck disagrees, saying a variety of factors, including cost savings, give him confidence in the company’s forecast.
He upgraded the shares to Overweight from Neutral on the news, with a $359 price target.
Good news for FedEx typically is a positive signal for the U.S. economy. Both it and United Parcel Service are often used as a proxy for economic strength because strong results for them can indicate that consumers and business are ordering more goods. That would be particularly welcome now, when weakening economic data has investors looking for reassurance that the U.S. can avoid a recession.
Unfortunately, in this case it doesn’t appear that investors can extrapolate economic strength from FedEx’s own, as the stock is reacting to company-specific factors. “The FedEx results look largely stock specific and less macro related,” as Mizuho Securities’ Daniel O’Regan put it.
Of course, if the economy were to seriously falter, FedEx and other logistics companies would feel the pinch. And it is worth noting the company’s outlook implies that revenue for the fiscal year ahead will rise by a percentage in the low to mid single digits, which is above consensus and a positive signal about the economy.
Nonetheless, FedEx’s latest win is a bigger deal for shareholders than anyone else. Perhaps next month’s UPS report will be more wide-reaching, but until then, investors should look for other tea leaves to read.