FedEx’s Big Jump Post Earnings, and Housing Market Headache 6/25/24

0:02Live from the NASDAQ market site in the heart of New York City's Times Square. This is Fast dollar face off. Today is opening day for the new McDonald's value meal. It's been a rough year for the stock. Will this be the right recipe for Mickey D's revival? A fast money show and tell is on tap. Plus, bearish comments from the CFO putting a hurt on Walmart shares. Novo Nordic gets the go. Go ahead to fight obesity in a massive new market. And investors saying ahoy maybe to the cruising stocks. And later, Rivian charged up after hours the R in Dan Zebra, Roth climbing on a huge investment from VW.

0:49All the details just minutes from now. I'm Melissa Lee. Come to you live from Studio B at the Nasdaq on the desk tonight. Tim Seymour, Bono and Eisen, Dan Nathan and Guy Adami. We're going to get to the housing drop in just a moment. We start with an earnings alert on FedEx shares of delivery giants soaring after a top and bottom line beat and solid guidance. The conference call just getting underway. Frank Holland joins us for the very latest. Hey, Frank. Hey, Melissa. Shares obviously moving a lot higher, partly on FedEx saying we'll conduct an assessment of FedEx Freight. That's one of the big reasons that FedEx shares are popping.

1:21So I spoke to an analyst. They believe that's also a big reason for the stock's rise after earnings. So FedEx Freight is a less than truckload business, the biggest in the nation. It competes with stocks like XPO and Old Dominion. You also see shares of both of those moving higher in the after hours on the news. In the release, the company says it will look at the role of freight in the portfolio. We'll look for more color on the call, of course. So overall, a pretty strong quarter. Guidance, as you mentioned, was strong in line with estimates. Also, we got confirmation the company still plans to save about$2.2 billion through its Drive cost-cutting initiative program.

1:55But there are still quite a few questions about the impact of losing the post office air delivery contract. Spoke to Citi, they pegged the profit impact from losing that contract this fiscal year at about$500 million. Again, expecting more color on the call. So all around a pretty strong report. The one issue, it could be margin, express and ground margins, both missing. Margin's really a proxy for the efficiency of the network. Also, something a lot of analysts are watching is the company combines its express and ground service when it comes to delivery. Melissa, back over to you. Frank, is the assumption that FedEx could actually wind down that business since we're seeing the competitors move higher?

2:30I don't think wind down, possibly a spinoff or maybe even a sale. This is a very valuable business. Again, the biggest in the nation. They did announce that they're closing a few terminals. The pricing power that they saw was kind of flat. It went down a few cents per shipment. So nothing to really be concerning. But they look like they're trying to optimize the business again, potentially for a sale or a spinoff. We saw something very similar with XPO, where, in fact, they spun off the other parts of the business to make XPO a pure play LTL trucking business. LTL is generally used more for things like industrial purposes, manufacturing.

3:02So it is a very good business overall. When you talk about a company like Old Dominion, as known as one of the blue chips in that space. But the question is, does it fit into the portfolio of FedEx? We also saw UPS do some similar things just this week. They sold off their logistics business. And a few years ago, they actually sold off their less than truckload business as well to focus more on their e-commerce parcel delivery business. And now we're seeing them move more into data similar to FedEx. Frank, thanks so much. Frank Holland, keep us posted from the conference call. That conference call is underway right now.

3:32So I guess competitors moving higher because in theory, the value could be unlocked. We could see the value of this actual business. Tim, your shareholder, correct? Yeah, it's I'm not a shareholder now. I've certainly been one. And it's hard not to think about FedEx in a blue chip category, although there was a time probably five or six quarters back. We were really waiting for the company to get their mojo back. And they really have. And I think that's what the reward is. This is clearly a glass half, excuse me, A glass totally full response to what I thought were glass half full numbers or maybe glass half empty.

4:01The stock was down almost 15 percent going into this over the last three months. The dynamics around their express business, I think you have some some yield issues, actually. And I think if you look at overall what's going on in shipping right now, shipping weakness is the story. The question is, should they be rewarded for optimizing the portfolio? That's that's the story here. People talk about they cut 2000 jobs three weeks ago. Who cares? There's 325 ,000 people that work at FedEx full time, another 200 part time. I don't know. That's not the signal. It's not signal to the job market. But the cost cutting effects here, this is something we're hearing out of industrial companies.

4:36We're hearing it from everyone. Market seems to like it. Yeah, I remember we had this on Trader to Faded either earlier this week or last week. And I definitely faded this one. So it's time to, you know, kind of pay my come to the table and and pay my pound of flesh. Listen, I didn't think they were going to be able to cut their their weight of profitability. But my concern was that sequentially over the last two or three quarters, you've seen those revenue numbers either be flat to slightly down. And they were actually up here. And then the guidance coming into 2024 was less than stellar. And you saw that kind of be corrected on this call.

5:05I do still have concerns as it pertains to potential sales or spinoff of businesses because you saw UPS kind of get punished for doing the same things on the logistics side. So I can understand the drive, the drive cost cutting measures and saving four billion dollars. But I would be cautious against cutting parts of the business that get a higher valuation. So 90 percent, we talk about this, 90 percent of FedEx are two things. It's basically express and ground freights, very small. Be honest with you. And I think Frank alluded to it. Margins were disappointing in the context of what the street was looking for.

5:43With all that said, I mean, this comes down to just a valuation story. The self-inflicted wounds that FedEx had from May of 21 until sort of the middle of 22 was just that, self-inflicted wounds. And, you know, I've tried on the way down to be bullish on valuation. But just start to do the math and say at a 15 multiple, it's a$300 stock, which is where it's trading now. If this were ever to get a market multiple, which is not going to happen, you know, you're talking about a stock should be significantly higher than this. It deserved it of a high teens multiple, in my opinion, given the fact that they've seemed to figure it out.

6:15So it should go higher. I'll say this. I've said that. You know how many times I've said that and watched the stock? Many. Many. And just go right down as well. So the value trap that FedEx has been over the years is significant, but maybe they have finally figured it out. I mean, the move is just staggering for a transform. Well, last quarter, the stock gapped up 70%, made a new 52-week high, and then proceeded to just fill in the whole gap and then go lower. So here we are, stocks at 295 in the aftermarket. Again, that quarter, that beat, that guide, I don't think like on just those numbers, you know, you're looking at mid-teens kind of expected earnings growth, low single digits sales growth.

6:50And then you throw that margin implication in there. It doesn't make a lot of sense to me. So, again, maybe people were looking at UPS trading at 52-week lows down so much over the last couple years or so, and they were just kind of pressing this one. But I don't think it deserves to be at$295. There's been persistent weakness in shipping. I don't know why that changes. And it gets back to what are you willing to pay for it? FedEx has traded as low as 12 times, so it can go cheaper. Meantime, some real headaches for the housing market. The XHB Home Builder ETF dropping nearly 3 % today. Its biggest decline since April.

7:23Among the names of the biggest losses, Lowe's, Williams-Sonoma, Masco, and Home Depot. The move coming as economists at Bank of America warned the housing market will remain stuck for a number of years, citing reduced affordability, a lock in effect for homeowners and limited activity. They do not see relief until at least 2026. Meantime, the S &PK-Shiller National Home Price Index rose to a record high, up 6.3 percent from a year ago, and 30-year mortgage rates remain stubbornly over 7 percent. So can this trade get out of the rut, especially if we don't see a lot of velocity on the market in terms of transactions?

7:59It's not really, well, I understand what you're saying, right. But, I mean, two, three days ago or last week, this was making an all-time high, the XHB, at I think 111 and change. Now, it's obviously come off maybe about 8 % or so. But I get where we're going with this, and it all speaks to the health of the consumer and what's really going on. I don't think the XHB is the best-created ETF of all time, but that doesn't matter. It's still obviously forecasting something. But I do think it's problematic. And if you just look at the underlying stocks like a Home Depot, like a Lowe's and some of these names, they've been telling a much different story.

8:29Then you start throwing the dollar stores to round out the consumer and say, wait a second, maybe there's something more here. So I think this is absolutely something you've got to watch very carefully. There are dollar stores, supermarkets. I mean, we're going to talk about McDonald's later. But this is a real broad swath of companies telling you something bad about the consumer. Two words. Pool court. They're two words that I've never heard in the stock market in my 26 years in the business. Now you've heard of pool court. I've never heard of pool court. Well, good thing it's very obvious what they do.

8:56And so this morning I'm looking at my screens and I'm looking at the XHB. I'm looking at Home Depot. I'm looking at a lot of these like housing. And then I see that they're not renovating. So it's kind of interesting to me. I mean, I think the guy, what do they do? They sell pool. They distribute pool supplies. I mean, like, should they change their name? Somebody at home is asking that question. All right. So I didn't know until I didn't know until 10 a.m. this morning. OK, it's called Pool Court. I've never heard of it. OK, like. And so I'm just saying, like the ultimate discretionary thing.

9:26The last time this stock was trading like the, you know, the home stocks like back in 2020 into 2021. And it's been a devastation since then. But, I mean, it's taken a lot of this stuff down. Yeah. By the way, I was the pool guy in college. No doubt. Can I tell you something? Hold on a second. You should have filmed some of this. You wouldn't be working right now. Yeah. I mean, that's a different kind of show. This is family reading. The consumer dynamics here are interesting. The fact that the XHB, we all kind of chimed in today when we had our call earlier, which was that the different components of the XHB, which aren't necessarily just Lennar and Pulte, were all selling off.

9:59And they were all selling off as if there was almost something technical going on within that ETF. I think the dynamic around the consumer is interesting. I think despite the fact that homebuilders have had such a great run as maybe yields and rates have peaked, at least in terms of mortgage rates for the foreseeable. So there's enormous interest rate sensitivity. But at some point, it comes back to the consumer. And the lows in Home Depot performance today was the most interesting. I agree. Listen, despite the name, I wouldn't really conflate XHB with the builders. I think that's really where you want to be.

10:31And I can understand that they've run up quite a bit. And you might see a bit of consolidation. But really, the lack of velocity that we've seen in existing home sales and the inventory dearth that we have in that space, to me, is to the benefit of the builders. We're still about a million, a million and a half short from our long-term average. And I think really in terms of ability to kind of buy down rates and meet the consumer demand where they currently are, I think that's the pocket where you're still going to see that. A lot of these names, DHI, Toll Brothers, two names that I like, KB Homes also, have kind of gotten a bit more expensive on a price-to-book basis.

11:05So I would look there. But I still think KBH probably is your short-term winner. So then by extension, I would think that names like a masca or a mohawk, things that feed in the raw materials, should be a better plight in addition to the home builders because they have to make homes and put stuff in them as opposed to like a Home Depot or Lowe's or, you know. Totally agree. Well, it's interesting. Also, you know, think about the move we've been having in copper. Copper's given a lot of it back. But the dynamic around Dr. Copper isn't just that it's a speculative industrial metal and that, you know, the EV component of the grid and whatnot.

11:38But, I mean, truly industrial demand as it relates to housing, as it relates to the real economy, that's interesting. Put up a Lowe's chart. You'll see a classic double top, which technicians will say does not augur particularly well. And can you imagine, Tim, as a pool person, like somebody saying, Tim, can you move the umbrella for me, please, a little closer? Wait, that kind of pool boy or the kind of boy who suits leaves up from the pool? I thought it was a pool guy. Hold on. Let's clarify the terms here. I wasn't a cabana boy. I was a pool guy. So I would float into your backyard with my equipment.

12:10What does that mean, your equipment? Like the pole with the net at the end. To clean the pool out. Oh, no, like the chemicals in the pool. Correct. No, listen, we want to clarify things. Great summer job. Of course it was. I'd recommend it to people. It's really off the rails at 12 after. Let's get more on the weakness in home builders from Ken Zener, senior analyst at Seaport Research Partners. Ken, great to have you with us. Thank you. is it Pool Corp? I mean, should we be worried that higher interest rates are impacting consumers and their ability to get key locks, et cetera, and fund renovations, et cetera?

12:47Well, you know, we don't cover Pool Corp, used to cover it. But I would say this, enjoying your conversation, that homebuilders are an early cycle group. When the Fed cuts, they outperform the market early, which we saw in November to into one queue when we did, you know, we were all in and then we downgraded the group. So we are more focused on quality because if you look at the last 18 Fed cut cycles, 12 of which were non-recession, they outperformed the market about 30 percent and then that outperformance fades. And that's our current view on the home builders. So we like quality names where net income equals cash flow.

13:23If the mortgage rates remain at 7 percent or so, Ken, because the Fed wants to remain restrictive for longer to make sure inflation is tamed, then will the home builders be subject to you know, just continued mortgage buy downs, which will continue to weigh in margins? I wouldn't say they're already doing it, so I wouldn't say it's an incremental negative. I would highlight, and our work goes back to 1962, the public builders in the 60s and 70s did this, so it's part of their cost structure right now. I certainly don't think there's margin upside as incentives tied to mortgage buy downs will deteriorate.

13:58Historically, if the rates are going down at this point, it's probably be because of a weakening economy, which is not good for the demand side. Well, that's what I was going to ask you, Ken, because it seems like rates are not as much as it would seem like rates are the entire story. Homebuilders have gone up, rates up, rates down. It doesn't matter. I think it comes down to the unemployment rate. And if I'm right, what is the level where things start to move in a very sort of accelerated fashion? I assume you're saying accelerated fashion on the downside. So look, we don't know. Of the 18 Fed cut cycles, 12 were mid to late cycle, including 1994, 95, when the home builders outperformed and then they lagged the market.

14:40And I obviously cover stocks, so we don't want to be an economist here. But the demand they're seeing at current job levels really can only go backwards. And, you know, they obviously They have affordability issues, which is why they're doing incentives. So the risk to return is pretty flat for the group right now. And it's increasingly getting negative, in our view, if you have weakening job or jobless claims, et cetera. Back to the stocks. Right. So what you've said is that these homebuilders typically do better in early cycle, at least in terms of where you start to see the Fed cutting. In your notes, you actually point out that it's really after non-recessionary cuts is when these things rally a lot.

15:22And yet they've given us that rally now. Is that your way of saying this group is a sell? Because, again, I am someone that has been wrong as these things have hit fresh eyes, believing that also just the lack of velocity in the space, the consumer ultimately given ground. But certainly if a house costs 30 percent more or 50 percent more in terms of the mortgage at this point, it has to be worth less. Yeah, I mean, you brought up a couple of points there. First, they have had their outperformance. You know, they're up 40 percent, call it, January into March versus the market. They pulled back from that.

15:55And in terms of the interest rates, the buy downs, that's already in their cost structure. But if things get worse and the builders are building quite a bit of inventory, A, B, they are overlapping. So their market share tends to be concentrated in the top 50 markets. So they're all at the same knife fight with each other. And if demand fades, you know, we really want the lower cost, i.e. higher gross margin builders that are able to turn their assets and generate that asset land into cash flow. Is there you like the higher end sort of builders as opposed to the first time buyer sort of homes?

16:33We look at it quantitatively. So if you're high end, low end, it's how you do your job. So DHI has very good gross margins when you adjust for SG &A and financing costs. And they're a low-end builder. So some of the high-end builders have clearly benefited Pulte Toll from existing sellers bringing their equity in. But, you know, like Lennar, so we have NVR, Pulte, Lennar. Lennar has a unique story, I believe, in terms of their monetization of their other non-home building assets. And there just was news today about KKR buying a lot of apartment buildings, which we have to get the details on. But that's the type of thing that would convert either, you know, that's not net income, but into buybacks.

17:16And it does have a good ROE, which we like. All right. Ken, great to speak with you. Thank you. Thank you. Ken Zener of Seaport. So how do we feel about this trade, seeing that, you know, Diana Olick was saying just today that 7 percent, Every time we get below seven, even just a hair below seven, it triggers much more interest in transactions. Yeah, I think, Bono, as much as it's somewhat counterintuitive, I think the homebuilders can do well with a consumer that I think is strapped. The stocks have done really well. I'll say again, if you think the unemployment rate, which I believe is going to start to tick up in a meaningful way, now's the time to get out of these.

17:51Again, I don't think it's as much to do with rates as it is with the unemployment rate in the job market. The pain here is not overnight, clearly. And I do think we have a dynamic where much in the way different segments of the market have behaved differently in this Fed cycle. It doesn't mean that homebuilders can't also have been one of these groups that should have traded off when they didn't. In fact, when they traded higher, even though, yeah, I get the interest rate dynamic, but still relative to where rates were, should you be going to all time highs? Are you up 30 percent from where rates peaked back in 22?

18:24I don't think that makes sense. There's a lot more fast money to come. Here's what's coming up next. The skinny on a blockbuster day for obesity drug makers. Novo Nordisk gets the green light in China, and Eli Lilly makes a huge bet on AI for drug development. The very latest action in the pharma battle next. Plus, high-rolling high flyers. Delta Airlines splashing the cash on an A-list luxury lounge at one of the nation's busiest airports. But will the glitz and glam be enough to keep frequent flyers happy? We'll pop the cork. On this trade, next, you're watching Fast Money, live from the NASDAQ market site in Times Square.

19:04We're back right after this.

19:11Welcome back to Fast Money. Novo Nordisk gaining 3 % after its weight loss drug, Wegovi, was approved in China for long-term weight management. This after Novo announced a$4.1 billion investment to bulk up Wegovi and Ozempic manufacturing capacity here in the United States. Also in pharma, Eli Lilly saying it will work with OpenAI to develop novel treatments for drug-resistant bacteria. Both Lilly and Novo touching all-time highs on those headlines. And Alnylam Pharma seeing some more follow-through from its heart disease drug results. Another 6 % gain after yesterday's 35 % move higher. The top performer in the S &P biotech ETF today.

19:49What do we want to trade now? Well, Tim alluded to it yesterday. I mean, just in the math of Eli Lilly, and this has been true for a while. I mean, this is a company that's going to do$52 billion of revenue. It's almost a trillion-dollar market cap company. By comparison, Merck will do about$68 billion, and it's one-third the size. So there's something askew here. I'm not saying sell Eli Lilly. What I'm saying is understanding they're never going to be equals in this environment. Merck right now, given that math, is still a stock you want to own. I think it made an all-time high today. The two hottest trends in the stock market have united into one story today, AI and weight loss.

20:26Well, here's a question for you, because I saw this great doc a few months ago on CNBC. It was called Big Shot. You can watch it on Peacock, by the way. OK. All right. So you did that, doc. So let me ask you, when you see an announcement like China approves, you know, Wagovi, it doesn't matter because it's not going to be there for years. They just don't have the supplies. Right. I know that they just, you know, I'm just curious. Like, how do you think about that? If that's the thing driving price performance today, it just gives you greater confidence in the future. But there might be other drugs.

20:52And I'm sure there's Chinese manufacturers are working on this. Or an oral readout later. We're going to, you know, so there will be other drugs in the pipeline. But this shows the total address market is an actual number because it's approved. My point is we all know that. OK, like they've been skipping up the TAM for this. You know what I mean? It was 50 billion like seven months ago. Now it's 100. I saw Goldman put 130 billion. So we all know that. But like it's not too dissimilar than what's going on with AI is investors are pulling forward whatever excitement is going to come in the offing.

21:22And that's only the only concern that I have right here. I just think with Lilly, it's a case where pharma stocks as a group, I don't think. And this is certainly Tim's Pfizer that has this to it, too. You don't necessarily buy pharma stocks when they're cheap. They're cheap for a reason. It's kind of like commodity stock. They trade cheap and they're particularly cheap. And sometimes they're left for a while. Now, I think there are catalysts here and there. And we talked about this even with Gilead last week. Gilead, who had this announcement on essentially an existing legacy drug that people are more or less pushing back on the company, saying you've got nothing other than HIV and hepatitis.

21:59So, you know, the fact is you're getting the rest of the company for free. It's a long way of saying I think some of these companies you are buying when they're expensive. I've been buying Lilly in the last couple of months. I didn't own it at 400. And I think you can own it here. And I think those trends aren't going away. I think you can. And listen, I think Dan makes a really good point in terms of, you know, discounted cash flows getting kind of distance from the current stock price. And I would be 100 percent in the boat with you if we were talking about a private company. But I think AI and this subsector has really shown you how sentiment around stocks can lead to them continuing to outperform.