FedEx Earning Preview: Package Growth Forecast, Activist Changes In Focus Under New CEO

FedEx Earning Preview: Package Growth Forecast, Activist Changes In Focus Under New CEO

Raj Subramaniam will front his first quarterly earnings as FedEx CEO Thursday amid big changes to its near-term spending plans and a potential slow-down in package volumes linked to a possible U.S. recession.

FedEx  (FDX) – Get FedEx Corporation Report shares edged lower Thursday ahead of the package delivery group’s fourth quarter earnings after the close of trading and the first under new CEO Raj Subramaniam.

FedEx, which has been under pressure from activist investors at D.E. Shaw Group following the retirement of founder and former CEO Fred Smith earlier this year, is expected to see its bottom line for the three months ending in May rise 37.1% from last year to $6.87 per share, with revenues up 8.6% to just over $24.5 billion.

FedEx reiterated its full year profit forecast in March, guiding investors to earnings in the region of $20.50 to $21.50 per share, following a modestly weaker-than-expected fiscal third quarter.

The group should see labor issues subsiding from last year’s post-pandemic shortage, relieving at least some pressure on profit and operating margins. Higher fuel costs, however, as well as the broader slowdown in global economic growth could clip overall package volumes. 

“Since FedEx’s last earnings report in mid-March, the growth outlook for the global economy has been downgraded,” said Daiwa Capital Markets analyst Jairam Nathah, who carries a neutral rating with a $230 price target on the stock. “More specifically to FedEx, key drivers include a longer lockdown in Shanghai and a shift in US consumer spending towards services from goods.”

“We are also concerned of any normalization in international freight yields, if trade activity slows down and passenger airline capacity returns,” he added.

FedEx shares were marked 0.6% lower in pre-market trading to indicate an opening bell price of $227.70 each. 

Last week, the group pledged to add three new members to its board of directors while reducing its planned capex-to-revenue targets in order to return more cash to investors and aligning executive pay more closely to shareholder returns.

FedEx also boosted its quarterly dividend by more than 53%, to $1.15 per share, sending the stock on his highest single-day gain, in percentage terms, since the mid-1980s.

Founder and former CEO Smith, 77, was replaced by chief operating officer Raj Subramaniam in late March.

Subramaniam, a long-time FedEx executive who has toiled in the group’s complicated supply chain, will assumed CEO duties on June 1.

The 54-year-old Subramaniam faces many of the same challenges in his new role as investors look for profit margin improvement in FedEx’s Ground division, which continues to lag rival United Parcel Service UPS amid rising labor and transport fuel costs.

“We expect prudent conservatism with (fiscal year 2023) guidance assumptions consistent with a recently lowered macro outlook,” said KeyBanc Capital Markets analyst Todd Fowler, who carries an ‘overweight’ rating with a $300 price target on FedEx. “However, we estimate costs associated with elevated wages and network inefficiencies potentially represented as much as $5.00 per share of year-on-year headwinds in (fiscal year 2022). 

“While a portion of these headwinds may persist in the form of higher wages, our view is pandemic-related headwinds should subside, which, along with yield initiatives, should more than offset macro pressure,” he added.


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