Shares of Fedex Corporation (NYSE: FDX) are up over 5% the day after the company surprised investors with a beat on the bottom line. The $3.18 earnings per share (EPS) the company delivered was over 12% higher than analysts’ expectations for EPS of $2.82.
That’s the good news. The bad news is that the earnings beat was due to cost-cutting measures. There’s nothing wrong with companies taking such actions, particularly as the world is staring down a recession. And FedEx says it has “found” $1 billion in additional cost savings (most likely from its overbuilt ground operations) to shore up the bottom line in future quarters.
But companies can only play defense for so long. At some point, FedEx will miss on earnings if it can’t shore up its revenue base. And that’s a story that investors can see from the FedEx stock chart.
A Pattern is Emerging
FDX stock was trending lower before its fiscal year 2023 second-quarter 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 in the last two years. The stock goes up after Q2 earnings and drops shortly afterward.
However, for the last 18 months, the stock has been in a bearish pattern of lower highs and lower lows. And that’s the story that investors need to be watching closely. The recent surge may allow for a profitable trade, but it’s not a buying signal for long-term investors.
Demand is Weakening
FedEx has been warning about lower demand since its last earnings report. This has become a familiar pattern for companies attempting to lower the bar to climb over it. But in the case of FedEx, it has more poignancy.
It was only natural that demand would slow down after 2020. As the economy reopened, demand for e-commerce was bound to move off record-high levels. But when a company such as FedEx says demand is slowing after Amazon, Inc. (NASDAQ: AMZN) also warned of lower demand, it would be wise for investors to take notice.
Still, before this earnings report, the company was managing to beat revenue projections on a year-over-year (YOY) basis. However, the same can’t be said for the company’s earnings. This marks the second consecutive quarter that FedEx has missed earnings on a YOY basis. That is only feeding into investor expectations of an earnings recession in 2023.
A Bellwether for the Markets?
I don’t know if it’s fair to say that FDX stock is a barometer for the broader market. Some of the economic growth shifted from goods to services in the past year. So, it may be more accurate to say that FedEx is a barometer of consumer sentiment.
Heading into 2023, consumers are pulling back on their discretionary spending. That’s likely to continue 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 expectations for earnings. However, while this has the predictable effect of sending stock prices lower, investors are finding out that the stocks aren’t recovering if the companies beat on their lower expectations.
FDX Stock is a Hold
Analysts tracked 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 have been quick to issue price targets following the earnings report, and the reviews are mixed.
There’s a path for FDX stock to move higher. A reopening in China would help. And the company may be able to execute its cost-cutting strategy to keep earnings in line with expectations. But without a meaningful dividend to speak of, the company will have to show shareholders how it plans to deliver for them.