FedEx’s (FDX) express business is expected to see continued headwinds in the second half of fiscal 2024, though freight and ground should support the company’s earnings, UBS Securities said Wednesday.
Late Tuesday, the parcel delivery giant projected a drop in full-year sales after its fiscal second-quarter results missed Wall Street estimates amid demand headwinds. The express segment’s operating income fell due to lower revenue, which was driven by volume declines, lower fuel surcharges and reduced demand surcharges, according to the company.
UBS said the revenue and margin performance of the express segment was worse than the firm’s expectations. The brokerage lowered its full-year per-share earnings estimate for FedEx to $17.60 from $18.50 amid “weaker” express margin performance, analysts Thomas Wadewitz, Michael DiMattia and Michael Triano said in a note.
FedEx shares were down nearly 11% in Wednesday late-afternoon trade.
The demand backdrop continues to be “difficult,” Chief Executive Raj Subramaniam said on an earnings conference call late Tuesday, according to a Capital IQ transcript. The company retained a majority of the volume it won over the summer from rival United Parcel Service (UPS) and following the shutdown of Yellow Corp., Subramaniam told analysts, adding that the express segment still requires “more work” to be done. Yellow announced in August that it filed for bankruptcy protection.
“With more volume in the express business coupled with an improved cost structure, we believe that the profitability with the express segment should turn higher looking out a few quarters,” Wadewitz, DiMattia and Triano said.
FedEx’s results likely “provide reason for caution” at UPS regarding volume and revenue per piece, the UBS analysts said. “It is unlikely that volume and yield patterns at (FedEx) are idiosyncratic and that the broader airfreight market is likely experiencing similar trends.”
Although FedEx’s ground business is expected to face more difficult comparisons in the second half, it should see margins improve from a year earlier, according to the analysts.
For fiscal 2024, FedEx now projects a low-single-digit percentage fall in revenue year over year, compared with its prior outlook for sales to be flat. It expects non-GAAP EPS of $15.35 to $16.85 before certain retirement plan adjustments, and $17 to $18.50 after business optimization costs are also excluded.
The company’s guidance seems “achievable” amid its cost-cutting initiatives, UBS said. “We believe (FedEx) has additional cost levers in (2025) and in following years due to Network 2.0, which can support margin improvement,” the trio wrote. “However, we also believe the cyclical backdrop is an important factor and a cyclical lift in domestic express and international package and airfreight markets is a key lever.” UBS has a buy rating on the FedEx stock, with a $323 price target.