At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
For whom the bellwether tolls
Only nine days remain until "economic bellwether" FedEx (NYS: FDX) rings in with first-quarter 2012 earnings. Wall Street is already warning that this may become the ding-dong of doom. Last week, we talked a bit about Credit Suisse's bearish call, when the analyst downgraded FedEx in favor of UPS (NYS: UPS) and warned the latter would do better than the former in a recessionary economy. This week, two more A-list analysts are chiming in with negative opinions on the upcoming earnings report. Who are they, and what do they say?
First up is Brit banker HSBC. We don't know too much about the reasoning behind this rating, but according to Briefing.com, HSBC is mimicking Credit Suisse by assigning a neutral rating on FedEx, despite being more bullish on UPS and Expeditors International (NAS: EXPD) . Worse news for FedEx investors: The closer we get to earnings day, the more pessimistic HSBC's predictions. Monday, the analyst knocked $18 off its price target for the stock, which it now values at $82 per share. And the worst news of all? HSBC currently claims 100% accuracy on its air freight and logistics picks in CAPS.
Bank of America
Whatever you think of Bank of America (NYS: BAC) as an investment -- and there's currently room for pessimism, as the company sells itself off piecemeal, lays off workers, and fends off lawsuits -- the analyst has historically been a real stock-picking star. But now this star is falling on FedEx.
According to B of A, FedEx jumped the gun when it gave a "bullish outlook for GDP growth acceleration in 2H11 in June." The banker notes that FedEx's prediction of 2.5% U.S. GDP growth for the year flies in the face of recent "decelerating trends," and that this bodes poorly for FedEx's own results. Indeed, B of A's own estimates suggest GDP growth will reach just 1.6% this year -- fully one-third below the number on which FedEx based its earnings expectations. As the analyst points out, the Institute for Supply Management's August PMI report showed almost no growth trend whatsoever:"Rail carloads [Warren Buffett's favorite metric] are up 0.4% quarter-to-date" while "July truck tonnage was down 1.3% sequentially."
So far, that's mainly bad news for companies like Union Pacific (NYS: UNP) , CSX (NYS: CSX) , and YRC Worldwide (NAS: YRCW) . But here's the real kicker from B of A: International Air Transport Association air cargo volumes were negative for the third consecutive month. Shippers also anticipate a "shorter, more condensed peak period" in which to earn their profits this year, and, accordingly, a longer stretch of subpar deliveries.
In short, B of A thinks things look so bad right now that it's not just following HSBC's lead and cutting its price target, it's cutting it twice as deeply -- $35 in all, from $115 to $80.
Ouch indeed. Wall Street's certainly painting a pessimistic picture here, and if truth be told, it's one I share. But is it at least possible FedEx could surprise us? Let me play devil's advocate for a moment, and explain how Wall Street's pessimistic projections just might be setting FedEx up for a rebound when it reports next week.
If you throw out the outlier year 2009, when earnings fell off a cliff and the stock's P/E skyrocketed, investors have historically been willing to pay about 19 times trailing earnings for a share of FedEx. That's roughly the P/E ratio FedEx has circled around since 2005. If you assume it's also the "right" price for FedEx, then to deserve the $80 share price that HSBC and B of A assign the stock, all FedEx should really need to do next week is report trailing-12-month profits of $4.21 per share or so. According to data provider Capital IQ, FedEx already has earned $3.37 per share over the past three quarters. Thus, if FedEx can eke out an $0.84 profit in fiscal Q1 2012, that should be enough to at least justify keeping the stock at "hold."
As of this moment, the Wall Street consensus forecast for FedEx is $1.51 per share for fiscal Q1 2012. To me, this suggests there's enough margin of safety for FedEx stock to survive earnings day even in the event of a pretty sizable earnings miss. On the flip side, if FedEx earns anywhere near what it's still expected (by most analysts) to earn, the stock could fly.
How will FedEx fare, when all's said and done?Add it to your Watchlistand find out.
At the time thisarticle was published Fool contributorRich Smithdoes not own shares of any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 410 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of FedEx, United Parcel Service, and Bank of America.Motley Fool newsletter serviceshave recommended buying shares of FedEx.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.
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