The plunge in FedEx (NYSE:FDX) shares is accelerating. They hit a three-year low yesterday on the news that China is probing the world’s largest package shipment company on some “wrongful” deliveries.
According to a Wall Street Journal report yesterday, changes to FedEx’s internal protocols to comply with the Trump administration’s crackdown on Huawei Technologies Inc. caused the delivery giant to misroute two of the Chinese company’s packages to the U.S. China said over the weekend it was drawing up a list of “unreliable entities” that harm the interests of local companies, a move that could potentially put FedEx business in China at risk if the trade dispute between the world’s two largest economies escalates further.
With FedEx being caught up in this trade tussle, the Street view on its stock has turned more bearish. Analyst Thomas Wadewitz at UBS cut his stock price target to $136, the lowest of the 27 analysts surveyed by FactSet. He estimates that FedEx’s China-related business revenue is about $4.5 billion, or 6% of total sales.
FedEx stock slumped 1.3% yesterday to close at $152.34, pushing it to the lowest level since July, 2016.
The selloff comes after a four-week losing streak in which the stock tumbled 18% through Friday. In comparison, shares of rival United Parcel Service Inc. (NYSE:UPS) dropped 13% in the same period, while the Dow Jones Transportation Average lost 11%.
FedEx Is Struggling on Many Fronts
While international trade, and China’s threat in particular, is the latest negative catalyst pressuring FedEx, the company is facing a multitude of other troubles too. The parcel carrier had been struggling on many fronts even before the latest setback.
The weakness in global demand, especially in Europe where FedEx was betting big after its 2016 acquisition of Netherlands-based parcel delivery company TNT Express, and challenges coming from growing e-commerce are among the key issues weakening its growth.
In March, FedEx reported disappointing fiscal third-quarter earnings, while slashing its full-year outlook for the second time in three months. The company now expects a $4.5 billion increase in sales for the fiscal year that ended in May. That would be a drastic drop from its earlier forecast of $6 billion for the year. Adjusted earnings for the fiscal year will be $15.10 to $15.90 a share, down from a previous forecast of $15.50 to $16.60.
The company’s 2016 acquisition of TNT is still very much a work-in-progress as its has failed to unlock the value that investors were hoping to see. FedEx said in March the integration costs for the acquisition are expected to exceed $1.5 billion through fiscal 2021, with the potential of further escalation. The integration challenges and the slowing European economy have raised doubts about the benefits of the TNT deal, with some analysts questioning the wisdom behind this massive undertaking.
Bottom Line
As we had recommended in our article on FedEx in December, investors should steer clear of cyclical stocks tied to global economic growth. FedEx is a macroeconomic bellwether and, unfortunately, has got caught in the crossfires of the escalating trade war. Investors shouldn’t get tempted by the stock’s steep decline this year as, in our view, this bearish spell hasn’t run its course. Investors should avoid catching the falling knife.