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By Curzio ResearchJune 28, 2024

Earnings manipulation? How FedEx legally boosted its stock price

Earlier this week, FedEx (FDX) reported its latest earnings… and if you took a look at the stock action afterward, you might think the company had a blowout quarter…

But that wasn’t the case.

FedEx reported a 2% decline in earnings year over year and kept guidance in line with expectations.

Yet, the following trading day, the stock was trading up around 15%… close to its all-time high.

The disconnect between the company’s results and its stock price may seem confusing… But a look under the hood reveals a clever strategy—one that has implications for large caps across the board…

Large caps should take a page from the FedEx playbook

The secret to FedEx’s recent stock action is simple: earnings manipulation.

That might sound sketchy—but it’s not. It’s perfectly legal and actually pretty brilliant. And it’s a strategy that other large-cap companies would be wise to implement…

The first component is cost-cutting.

You see, when you get as big as FedEx, it becomes harder to find new, significant avenues for organic growth. A simpler way to give the business a boost is to reduce your expenses. After all, when you’re a multibillion-dollar company, you’re spending billions a year on everything from business development to employee salaries to office supplies. More often than not, there’s a good deal of wiggle room to trim $1 billion here and there without negatively impacting operations… But it can make a big difference to the bottom line.

In the latest quarter, FedEx reported cutting capital expenditures (capex) by 16% (about $1 billion) year over year… and it plans to cut another $4 billion in expenses next year.

And this brings us to the second component of FedEx’s strategy…

It’s using the cash it saved from cost-cutting to buy back shares in a big way…

In the latest quarter, FedEx spent $1 billion buying back shares… and it plans to buy back another $2.5 billion in fiscal 2025.

Remember: Share buybacks create a major tailwind for a stock… Not only do they reward shareholders, they also boost earnings… as profits are divided by a smaller number of shares.

Put simply, FedEx is using cost-cutting and share buybacks to push its stock higher despite the company’s lack of overall growth.

And any company with a strong enough balance sheet and enough free cash flow can do the same…

Consider tech stocks Amazon (AMZN), Alphabet (GOOG), Microsoft (MSFT), and Meta (META). Combined, these four companies spent a record $44 billion on capex in Q1 2024… And they’re expecting to spend more than $200 billion for the full year.

As discussed above, if these companies can find ways to cut $1 billion here or there, it would significantly affect their bottom line.

This strategy is particularly important in a stagnant economy, where growth is even harder to come by.

Put simply, we’re likely to start seeing countless large caps—from tech titans to energy giants—cutting costs… buying back shares… and using similar strategies to (legally) manipulate their earnings and send their stocks higher.

How to play the situation

If you don’t have exposure to large caps right now, it’s time to add some to your portfolio.

Focus on companies with strong balance sheets that generate tons of free cash flow. These companies are the ones that can afford to cut costs and buy back shares.

Also, look for companies with the highest capex—as they have the most wiggle room to trim expenses.

The bottom line is that large caps will likely take a page from the “FedEx playbook”… which will send their stocks surging, regardless of earnings.

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