FedEx’s (FDX) mixed guidance trends signal a “lack of earnings visibility” while its fiscal Q3 commentary points to a “challenging” Q4, Morgan Stanley said in a Wednesday note.
The company reported fiscal Q2 non-GAAP diluted earnings Tuesday of $3.99 per share, up from $3.18 a year earlier, while revenue declined to $22.2 billion from $22.8 billion. For the full fiscal year, FedEx expects revenue to decline by a low-single-digit percentage, compared with its prior forecast of flat revenue growth.
Morgan Stanley said fiscal Q2 earnings missed Street estimates, as expected, and that the quarter’s results demonstrate the challenge that the revenue versus cost dynamic presents. The investment firm said pressures on the company’s revenue outweigh the gains from its DRIVE cost-cutting program.
“We believe FDX is an idiosyncratic revenue story rather than an idiosyncratic cost story like the market believes,” said Morgan Stanley. According to the firm, savings from the DRIVE program are already factored into Street consensus, implying that revenue will likely drive incremental beats and misses in comparison with estimates.
Morgan Stanley also said FedEx estimated it will need to offset almost $4.5 billion in cost inflation, and this will entail “several billion of incremental revenue growth.”
Morgan Stanley has an equal-weight rating on FedEx, with a $205 price target.