FedEx has shed half its market value in the past 2 years, and Morgan Stanley says investors should brace for another 'volatile' quarter for the package giant
- FedEx has shed half its market value since January 2018 - and the free fall doesn't appear to be stopping soon.
- Morgan Stanley warned in a note to investors on March 2 that the $65.5 billion company will have another "volatile" quarter.
- This time, coronavirus is the culprit.
- Credit Suisse analysts wrote in a March 4 note that coronavirus-induced manufacturing declines will slash $1 billion from FedEx's top line this quarter.
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FedEx has had a rough few years, with its market capitalization plunging from $71.3 billion in January 2018 to $36.5 billion as of March 2020. It's struggled for a slew of reasons, including competition with Amazon.
But there's now a new factor threatening to harm its stock even further, according to Morgan Stanley: coronavirus.
Over the past couple of years, the two biggest factors behind FedEx's struggles have been the encroaching threat from Amazon's growing transportation network and unexpected costs following the acquisition of European package company TNT. In its March 2 note to investors, Morgan Stanley added the coronavirus - which has already hit the markets hard - to the mix.
The freight-transportation team, led by analyst Ravi Shanker, wrote to investors that they expected this quarter to be a "period of stabilization" for FedEx, which saw a particularly brutal earnings season in December. In the morning after its earnings, the package giant shed $3.5 billion in market value.
"However, with the global development of coronavirus since F2Q, it's clear that we're flying with limited visibility into 3Q, rather than in clear skies," Shanker wrote, adding that "the global proliferation of coronavirus casts a cloud and headlines will continue to drive the stock."
Morgan Stanley's freight analysts set FedEx's target price at $109 following its earnings on March 17. Credit Suisse's freight-analyst team set a target price of $159 in a March 4 note to investors. As of markets close on March 3, FedEx's stock price was $133 per share.
UBS told investors last week that the bank expects FedEx's Asia revenue to sink by 70% in February. Credit Suisse added in its recent note that FedEx's international air-freight sector will lose $1 billion from its top line this quarter.
Coronavirus is slamming shippers across the board, particularly due to Chinese manufacturing activity slipping. Official data from China's National Bureau of Statistics released last week indicated that factory output in China hit an all-time low last month - even below than the previous record low of November 2008. The manufacturing index hit 35.7 in February; any number below 50 indicates a contraction.
Should coronavirus continue to impact China, South Korea, and other major hubs, the availability of goods like cellphones, cars, medicine, and apparel may tighten. China exported $452.2 billion of goods to the US in 2019, while South Korea exported $77.5 billion.
Donald Broughton, the managing partner of Broughton Capital, wrote to investors in a February 25 note that "the coronavirus is already driving negative economic consequences more dire than SARS and could produce short-term economic calamity rivaling the 2008 -2009 Great Recession."
In all, Shanker's team does not foresee FedEx bouncing back before its financial year ends in May.
And moreover, Credit Suisse's freight-analyst team, headed by analyst Allison Landry, said FedEx will not be able to gain back those lost revenues and margins that coronavirus is wiping away. She lowered her estimate of FedEx's earnings per share in fiscal year 2021 from $13.55 to $12.37.
"As China production ramps back up, supply chain constraints are mounting - giving rise to a meaningful tightening in international airfreight capacity and driving up demand for premium services/rates," Landry wrote. "Although we see the potential for upside, and for FedEx to fully recoup lost revs and margin in fiscal '21, we have not yet dialed this in."