FedEx Corporation (NYSE: FDX) is a solid business, but its latest results give another reason to fear that a recession is near. The company underperformed in all metrics, contracting versus an expectation to grow and reducing guidance in what may be the first of several reductions this year. The FedEx news sent ripples of fear through the entire transportation sector, driving share prices for competitors like United Parcel Service (NYSE: UPS) and J.B. Hunt Transportation Services (NASDAQ: JBHT) down.

The takeaway is that the calendar Q3 earnings reporting season will be disappointing, and there is also an economic concern. FedEx and other shipping giants are leading indicators of the economy, but FedEx didn’t grow this quarter.  Upcoming data may reflect the weakness, which won’t benefit the broader stock market. 

Shifting Habits Offset FedEx Quality Improvements

FedEx had a strong quarter financially, generating revenue and profits sufficient to sustain operations and the capital return program. However, $21.16 billion in net revenue is down 40 basis points compared to last year and is 140 basis points shy of the consensus, with margin contraction impacting the bottom line. 

The revenue weakness is attributed to a mix shift, with consumers turning away from higher-cost, higher-margin priority shipping to lower-cost, lower-margin options. Both operating segments contributed to the weakness, and there was one less day in the quarter. Even so, when adjusted for the day, results are still shy of consensus and come with weak and potentially optimistic guidance. 

Margin news is mixed. The company reports further progress in its DRIVE initiative and improving structural quality. However, the consumer shift also impacted the margins, which contracted compared to last, amplified by increased wage expenses. Operating margin is down 180 bps GAAP and 170 bps adjusted, leaving net income down by 23% and adjusted EPS by 20%. The adjusted EPS is aided by share repurchases, which were accelerated this year. The company bought back $1 billion in Q1, impacting EPS by $0.03, and is forecasting another $1.5 billion in buybacks by year’s end. 

Guidance is not OK but could be better. Revenue and earnings are sufficient to sustain operational and balance sheet quality, with revenue expected to grow by year’s end but reflecting reduced demand and the Q1 consumer shift. The takeaway is that the revenue target was reduced to low single digits from mid-single digits, and the earnings narrowed at the high end, and both are likely optimistic. There is little expectation for economic headwinds to improve in CQ3 and CQ4, and it will be several quarters before the FOMC’s rate cuts have an impact. 

Analysts Cap Gains in FedEx Stock, Expect Downward Pressure in Q4

The analysts are unsatisfied with FedEx’s results and are reducing their price targets following the release. MarketBeat tracks over a dozen revisions within the first day of the report, including numerous price target reductions and several downgrades. Their activity has the consensus target moving lower and capping upside potential at the high end of a trading range. However, the negativity is offset by a single increased target, and a consensus is that the stock is still a buy likely to return to the top of the range, assuming subsequent reports are more favorable.

FedEx’s price action confirms resistance at the top of the trading range. The market fell 15% after the report, showing strong resistance to higher prices at that level, and is likely to continue lower over the coming weeks. The best target for firm support is near the $235 level, which may be reached soon. The risk is that market sentiment will continue to sour and FDX stock will fall out of its range and move to the $200 level or lower. The opportunity for investors is to put this stock on a watchlist and wait for it to bottom. That will come in alignment with a brightening economic outlook.