FedEx's (NYSE: FDX) earnings fell short of expectations, causing the stock to drop by more than 10%. It cited the 'constrained labor market' as the biggest culprit for this decline. The company's difficulty in finding labor is leading many of its distribution centers and hubs to operate at between 65% and 80% capacity.
As a result, the company faces higher costs as it reroutes about 600,000 packages per day. Some other bearish factors were the company cutting its earnings outlook for 2022 and continued stress on supply chains which actually got worse this past month due to shutdowns in Asia.
Inside the Numbers
FedEx's earnings are closely watched as the company is seen as a bellwether for the global economy. In its fiscal Q1, the company reported earnings per share of $4.37 which missed expectations of $5 per share in earnings. Revenue came in just above expectations at $22 billion vs $21.9 billion. The company does face elevated comps as revenue grew 20% in 2020 due to increased demand for package delivery during the pandemic.
While certain segments have picked up, the company still issued a forecast that was below expectations. In 2021, it expects between $19.75 and $21 in EPS which is a slight downgrade from its previous forecast of EPS between $20.50 and $21.50. Overall, the company sees 7% revenue growth and 5% earnings growth for the year which is a disappointment relative to expectations coming into the year.
The biggest challenge is a decline in margins as operating margins declined to 6.8% from 8.5%. Essentially, the company is spending more to hire workers and having to spend to reroute packages as many facilities are running below full capacity.
The company is looking to hire 90,000 seasonal workers for the holiday rush which could prove to be especially challenging this year. However, FedEx is also raising prices by between 6% and 8% effective next year which should offset some of these pressures and lift margins.
Stock Price Outlook
FedEx is a high-quality company that has years of growth ahead of it as package delivery is only going to grow as e-commerce grows. However, its struggles are only going to get worse in the near term.
This could prove to be a great entry point as the company could raise prices, and shortages in the labor market and supply chain are likely to work themselves out.
For longer-term investors, the recent 30% dip makes shares look particularly attractive as it has a P/E of around 12 and a 1.3% dividend yield.