Weaker-than-expected earnings and falling sales deflate FedEx stock
FedEx shares declined on Wednesday as a less optimistic revenue outlook deflated the delivery company's recent surge. Despite the setback, several Wall Street analysts found merit in the turnaround plan that has propelled the stock higher over the past year.
In premarket trading, FedEx stock saw a 10.8% drop to $249.69 after its second-quarter earnings report on Tuesday failed to meet market expectations. This decline was poised to erase a month's worth of gains, although the stock had previously surged by an impressive 62% throughout the year — higher than the 24% gain by the benchmark S&P 500 index.
In the fiscal second quarter ended November 30, the FedEx earnings report showed per share of $3.99 from $22.2 billion in sales. Wall Street had anticipated per-share earnings of $4.19 on sales of $22.4 billion, based on a FactSet survey. In the same period last year, FedEx reported earnings per share of $3.18 on sales of $22.8 billion.
The FedEx share price rally has predominantly been fueled by cost-cutting initiatives. While the revised revenue guidance disappointed investors, analysts remain positive about FedEx's cost management, noting an improvement in its operating profit margin to 6.4%, up more than 1 percentage point from the same period the previous year. Despite a 3% decline in sales, this marks the second consecutive quarter of year-over-year profit margin improvement.
FedEx share price forecast: Raymond James lowers price target, keeps Outperform rating
In a research note cited by Barron’s on Wednesday, Raymond James analyst Patrick Tyler Brown wrote:
“We believe that change is afoot post FedEx’s recent DRIVE event that provided visibility into key changes that are likely set to drive better margins, earnings, and FCF [free cash flow] in out years”.
Brown also noted that FedEx could receive a boost to its freight business from the bankruptcy of delivery peer Yellow earlier in 2023.
During an earnings call on Tuesday, FedEx CEO Raj Subramaniam told analysts that the company had successfully retained the majority of the market share it gained from Yellow and rival United Parcel Service (UPS) during the summer.
Brown adjusted his target price for FedEx stock to $275 from $279 but maintained an Outperform rating. The target is based on an earnings multiple of 16 times FedEx's projected fiscal 2024 earnings per share.
A notable concern for FedEx lies in the performance of its internationally focused Express business, which operates through air routes. Volumes in this segment have continued to decline, with the division's operating margin reaching 1.3% for the quarter, compared to the 10.4% margin for the FedEx Ground division, responsible for truck-based deliveries in the U.S. and Canada.
In a research note shared with Barron’s, Citi analyst Christian Wetherbee said that the Express results might be influenced by cyclically low volumes impacting margins, suggesting that future results could show improvement.
“When the cycle turns (which may be happening now), we think leverage will return … We view any share-price pullback as a buying opportunity as we don’t think much has changed in the trajectory of earnings power through [fiscal] 2025”. Wetherbee’s FedEx share price forecast had a target of $300 on the stock and a Buy rating.
At the time of writing on Wednesday, FedEx stock was trading at $249.01 in premarket on the NYSE, down 11.08% on the day.
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