Dumping FedEx on Guidance? Why You Should 'Look Through the Trees'

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A setback is a set-up for a comeback, some would say.

That's what a few analysts and estimates for the next few years are saying about FedEx (FDX) - Get Report .

The News

FedEx shares were falling 13.54% to $149.80 apiece Wednesday after the company reduced full-year 2020 earnings per share guidance by 20%. Management is now looking for EPS for 2020 of between $11 and $13, below analysts estimates of above $14. The company implied it lost Amazon (AMZN) - Get Report as a customer, sees strong macroeconomic headwinds in foreign markets like the European Union partially stemming from trade issues, and expects continued operating margin pressure from new investments.

Analysts cut their price targets. They said they will need more visibility into earnings growth beyond 2020, specifically driven by renewed expectations of strong shipment growth and margin expansion, as investment costs relating to the integration of newly acquired TNT need to abate.

But a few of the analysts that cut price targets on the basis of near-term caution noted why it would be advantageous to look past 2020, and why FedEx could still be a long-term winner.

Buy FedEx Now?

"FedEx just pushed earnings out a year, as our new FY21 estimate is basically the same as our prior FY20 estimate," wrote Stifel analyst David Ross in a note. "In the near term, the company needs to navigate through the TNT integration and global macro headwinds." To Ross' point, earnings are still expected to grow roughly 12% in 2021 and 2022. Investors were expecting a possibility of slight earnings growth in 2020, but now it looks as if earnings for the year will contract roughly 16%, with potentially a positive swing-back in 2021.

Should Fedex continue to trade at 9 or 10 times forward one-year earnings come 2021 and 2022, the stock could come back up above $160. In the same note that Ross lowered his price to $171 from $185, he said the stock could be back at $180 in one year.

Goldman Sachs analyst Jordan Alliger, who wrote, "We are going to take the forest-through-the-trees approach," broke down one key reason FedEx's fundamentals may not be so threatened.

Alliger believes much of FedEx's competition, which includes United Parcel Service (UPS) - Get Report , is unable to match FedEx on it ability to service demand for "ever tighter delivery time frames." Of course, FedEx investors may want to keep an eye on investment from competitors looking to service e-commerce related shipments.

If Alliger's and Ross' points are valid, FedEx could see a return to growth, which would be priced into the stock at a later date from September 2019.

Just Be Careful

Firstly, the global economy isn't expected to strengthen. In fact, if the tariff war between the U.S. and China rages on, consumer and business spending could grow at lower-than-expected rates, and shipment volumes would take another hit.

Secondly, many are cautiously optimistic operating margins will expand as TNT investment costs abate. But we're not there yet.

So while it's highly unlikely FedEx's earnings multiple will fall from here, there's also discernible risk it won't expand much either. Risks to revenue growth and margins still very much exist.

Lastly, the stock isn't fully pricing in a draconian 2020 EPS scenario. Should it become clear earnings will come in at $11 per share for the year, the stock could fall to $110. And Morgan Stanley has a $120 base case price target.