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FedEx shares rose in trading on Wednesday morning after a number of Wall Street analysts quickly revised their price targets on the world’s second-largest package delivery company after a better-than-expected fourth-quarter earnings report.
fedex (FDX) which lost a major contract with the US Postal Service to its now larger competitor, United Parcel Service (UPS) has focused on cost cutting and efficiency under CEO Raj Subramaniam after pressure from activist investors last year.
The group has reduced its headcount in Europe and the United States while pledging to reduce overall costs by about $4 billion by the end of the next financial year, with about half of that number already extracted.
However, overall shipping volumes, especially those that generate wider margins, have largely stalled over the past year amid a sluggish global economy, stubbornly high inflation rates and the expiration of a US Postal Service contract later this fall.
FedEx was still able to post a 7.2% gain in March quarter earnings, to $5.41 per share, beating Wall Street expectations, even as total revenue rose just 1% from a year ago to $22.1 billion.
The group’s operating margins improved by about 400 basis points to 8.5%, with about a quarter of these gains coming from continued cost reductions.
FedEx’s cost cuts are set to boost profits
“The entire industry faced a challenging demand environment in fiscal 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 towards the high end of our original guidance range.”
He added: “Our transformation journey will continue in fiscal year 2025 while building on the outstanding progress the team has made. I have never been more confident in our future as we create the most flexible, efficient and intelligent network in the world.”
Looking to the current fiscal year, FedEx expects earnings of $20 to $22 per share, or $7.2 billion at the midpoint, with another $2.2 billion in cost savings.
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Anthony De Ruyter, a Third Bridge analyst, said cost-cutting is likely to remain the main driver of restoring profits to pandemic-era records, given persistent weakness in demand.
“Industry excess capacity remains a major issue facing the company and will need to be accommodated to drive results to the next level, but in the meantime FedEx is managing the current macro environment well,” he added.
FedEx shipping on the block?
Another key aspect of the market’s reaction to FedEx’s earnings update relates to discussions that the group may look to sell its freight trucking division.
“The management team and board, along with external advisors, are evaluating FedEx Freight’s role in our portfolio structure and potential steps to unlock more sustainable shareholder value,” Subramaniam said. “We are committed to completing this comprehensive and thoughtful review by the end of the calendar year.”
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Evercore ISI analyst Jonathan Chappell said the plans were a “real catalyst” for the overall earnings report and a statement that “lends credence to the upside potential in the sum of the parts given much higher multiples at comparable (less than truckload) tonnage.” Privileges.”
“We believe the key to FDX’s investment thesis is to continue to execute on its Drive savings program and seamlessly consolidate its ground/express business, rather than rely on an increasingly uncertain macroeconomic environment,” Chappell said, raising FedEx’s price target by $21 to $339 per share after last night’s earnings update.
“Although neither of them, especially the latter, is risk-free, recent implementation successes suggest that the scope of the guidance remains achievable throughout the year,” he added.
More from Wall Street analysts:
- Analyst updates price target for Oracle stock price after earnings
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- Analysts Adjust Micron Stock Price Target Ahead of Earnings
JPMorgan’s Brian Osenbeck also noted the potential benefit of valuing the shipping division, saying it “should not be underestimated.” In a note published Wednesday, he raised his price target by $63 to $359 per share, adding that “the turnaround at FedEx appears to be gaining momentum.”
Other changes to the price target come from analysts including Helen Becker of TD Cowen, who raised her price by $15 to $335, and Christian Weatherby of Wells Fargo, who raised her price by $25 to $300.
FedEx shares rose 14.7% in premarket trading to signal an opening bell price of $2,904.14 each, a move that would increase the stock’s 2024 gains to about 17%.
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