FedEx shares powered higher in early Wednesday trading as a host of Wall Street analysts rushed to overhaul their price targets on the world's second-largest package delivery company following its better-than-expected fourth quarter earnings report.
FedEx (FDX) , which lost a key contract with the United States Postal Service to its now-larger rival, United Parcel Service (UPS) , has focused on cost cuts and efficiencies under CEO Raj Subramaniam following pressure from activist investors last year.
The group has slashed headcounts in Europe and the U.S. while committing to around $4 billion in overall cost reductions by the end of the next fiscal year, with around half that figure already extracted.
However, overall shipping volumes, particularly those that bring wider profit margins, have largely stalled over the past year amid a sluggish global economy, stubbornly high inflation and the wind-down of the USPS contract later this fall.
FedEx was still able to produce a 7.2% gain in March-quarter earnings, to $5.41 a share, well ahead of Wall Street forecasts, even as overall revenues rose only 1% from last year to $22.1 billion.
The group's operating margins improved by around 400 basis points to 8.5%, with around a quarter of that gain coming from the ongoing cost cuts.
FedEx cost cuts set to drive profit
"The entire industry faced a challenging demand environment in fiscal year 2024," Subramaniam told investors on a conference call late Tuesday. "Our team focused on what we could control, and as a result we delivered full-year earnings toward the higher end of our original guidance range."
"Our transformation journey will continue in FY '25 as we build on the team's outstanding progress," he added. "I have never been more confident in our future as we create the world's most flexible, efficient and intelligent network."
Looking into the current financial year, FedEx sees earnings in the region of $20 to $22 a share, or $7.2 billion at the midpoint, with another $2.2 billion in cost savings.
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Cost-cutting will likely remain the main driver in recovering earnings back to pandemic era records, given persistent weakness in demand, said Third Bridge analyst Anthony de Ruijter.
"The industry's excess capacity remains a key issue facing the company and will need to be absorbed to drive results to the next level, but in the meantime FedEx is managing the current macro environment well,” he added.
FedEx Freight on the block?
Another key aspect of the market's reaction to FedEx's earnings update is tied to discussions that the group may look to sell its freight trucking division.
"Our management team and the board of directors, along with outside advisors, are conducting an assessment of the role of FedEx Freight in our portfolio structure and potential steps to further unlock sustainable shareholder value," Subramaniam said. "We are committed to completing this review thoroughly and deliberately by the end of the calendar year."
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Evercore ISI analyst Jonathan Chappell said the plans were a "real kicker" to the overall earnings report and a statement that "lends credibility to a sum-of-the-parts upside potential given much higher multiples at similar (less-than-truckload) franchises."
"We believe the key to the FDX investment thesis is continued execution on its Drive savings program and a smooth consolidation of the Ground/Express businesses, rather than relying on a macro that is increasingly uncertain," said Chappel. He lifted his FedEx price target by $21 to $339 a share following last night's earnings update.
"Although neither, but especially the latter, is risk-free, recent execution wins point to the guidance range remaining attainable throughout the year," he added.
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JP Morgan's Brian Ossenbeck also noted the potential benefit of the freight-division assessment, saying it "should not be underestimated." In a note published Wednesday, he lifted his price target by $63 to $359 a share, adding that "it seems that the transformation at FedEx is building momentum."
Other price-target changes come from analysts including TD Cowen's Helane Becker, who lifted hers by $15 to $335, and Wells Fargo's Christian Wetherbee, who took it $25 higher to $300.
Stewart Glickman, deputy research director at CFRA Research, who carries a 'hold' rating with an improved $298 price target, sees stronger international volume trends but notes challenges from the loss of the USPS contract.
"The loss of the business from the U.S. Postal Service (beginning in Q2 FY25) is expected to hurt operating income by $0.5B in FY25, more than projected incremental revenue growth this year, and international yields could be hurt by a glut of cargo capacity," he said.
FedEx shares were marked 13% higher in premarket trading to indicate an opening-bell price of $289.74 each, a move that would extend the stock's 2024 gain to around 17%.
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