Shares of FedEx took a hit on Wednesday due to a less-than-rosy revenue outlook, dampening the delivery giant’s recent rally. Despite this setback, Wall Street analysts still find reasons to be hopeful about FedEx’s ongoing turnaround plan, which has driven the stock to significant gains over the past year.
In premarket trading, FedEx saw its shares drop by 9.5%, reaching $253.31, after reporting its second-quarter earnings on Tuesday. This decline threatened to erase a month’s worth of gains; however, it is worth noting that FedEx’s stock had already surged by an impressive 62% this year prior to the earnings report.
One of the key factors contributing to FedEx’s remarkable rally has been its focus on cost-cutting initiatives. While the lowered revenue guidance was disappointing, analysts continue to have confidence in the company’s ability to control costs. In fact, FedEx has managed to improve its operating profit margin to 6.4%, a notable increase of over 1 percentage point compared to the same period last year.
In a research note, Raymond James analyst Patrick Tyler Brown expressed optimism that positive changes are underway following FedEx’s recent DRIVE event. This event highlighted key strategic shifts that are expected to drive improved margins, earnings, and free cash flow in the coming years.
Another potential boost for FedEx’s freight business could come from the bankruptcy of its delivery competitor, Yellow, earlier this year. During an earnings call, FedEx CEO Raj Subramaniam confirmed that the company successfully retained the majority of market share it acquired from Yellow and rival United Parcel Service during the summer.
While FedEx’s revenue outlook may be causing concern, analysts believe that the company’s efforts in cost-cutting and strategic positioning will help pave the way for future success. As investors navigate these challenging times, keeping a close eye on FedEx’s progress will be crucial for understanding the company’s overall performance.
FedEx Stock Faces Challenges in International Business
Analyst Brown has revised down the target price for FedEx stock to $275, maintaining an Outperform rating. This new target price is based on an earnings multiple of 16 times FedEx’s projected fiscal 2024 earnings per share.
Concerns Surrounding FedEx’s Express Business
One of the main areas of concern for FedEx is the performance of its Express business, which primarily deals with air freight. The volume of shipments in this division has been declining consistently. In the last quarter, the operating margin for the Express business was only 1.3%, in stark contrast to the 10.4% margin achieved by FedEx Ground, responsible for truck deliveries in the United States and Canada.
Citi Analyst Highlights Potential Improvement
Contrarily, Citi analyst Christian Wetherbee suggests that the Express results could be impacted by low volumes in the current economic cycle, implying that future results are likely to improve. Wetherbee expressed confidence in the stock, stating that any decrease in share price represents a buying opportunity. According to Wetherbee’s research note, changes in the trajectory of earnings power are not anticipated until at least fiscal year 2025. He maintains a Buy rating on the stock and a target price of $300.
Wider Impact on Delivery-Company Shares
On Wednesday, other delivery-company shares were also experiencing declines. UPS saw a premarket trading drop of 2.9%, while XPO was down by 0.5%.