The Fed resonated with FedEx.
On Sept. 18 the Federal Reserve cut interest rates by 0.5 percentage point to keep the economy from slowing, while FedEx's sluggish earnings report in the same week reflects what its CEO called "weakness" in the industrial environment.
“The magnitude of the Fed rate cuts yesterday signals the weakness of the current environment,” Rajesh Subramaniam, chief executive of the package-delivery and logistics giant, said during the September earnings call.
“Now we're not assuming a significant comeback on the industrial environment in the rest of this calendar year.”
Transportation firms grew rapidly during the pandemic's online shipping surge. But as demand returned to normal, they have been laying off workers, closing offices, and grounding vehicles to protect their profit margins.
Related: FedEx pilot salary: How much does the world’s largest cargo airline pay?
FedEx reduced its workforce by nearly 22,000 in the 12 months prior to March 2024, Chief Financial Officer John Dietrich said earlier this year.
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The company also plans to reduce daily flights and the number of U.S. cities served by air after its contract with the U.S. Postal Service ends on Sept. 29, leading to major pilot pay cuts, according to FreightWaves.
FedEx (FDX) stock is up 1.8% year to date, while rival UPS (UPS) is down 19%.
FedEx’s earnings disappoint investors
On Sept. 19, FedEx released its financial results for the fiscal first quarter ended Aug. 31. Both earnings and revenue missed analysts’ forecasts.
The company earned an adjusted $3.60 a share, down 21% year-over-year and below the $4.86 Wall Street analysts estimated. Revenue came in at $21.6 billion, lower from the year-earlier $21.7 billion and short of the $21.96 billion forecast.
FedEx has lowered its full-year outlook, expecting low-single-digit-percent revenue growth year over year, down from its previous projection of a low-to-mid-single-digit increase. It expects earnings per diluted share to range from $17.90 to $18.90, compared to the earlier forecast of $18.25 to $20.25.
Analysts surveyed by FactSet predict earnings of $19.96 per share and $89.69 billion in revenue for the year.
Related: Distressed shipping company files Chapter 7 bankruptcy to liquidate
The company attributes the quarter's decline in operating results to one fewer operating day and a drop in U.S. domestic priority package volume, which was offset by an increase in international economy package volume. Higher wages and purchased transportation costs also weighed on results, the company adds.
Economic uncertainty is prompting households and businesses to adopt a more cautious approach to spending and cost control, leading them to seek out cheaper services.
“We saw increasing demand for our lower-yielding services, and some of this demand increase was driven by a shift in customer preference worldwide from priority to deferred services,” Subramaniam said.
FedEx stock tumbled 14% following the financial results, trading at around $257 per share.
Analysts set lower goals for FedEx stock after report
At least 11 analysts downgraded FedEx stock or reduced their price targets after earnings.
Morgan Stanley downgraded FedEx to underweight from equal weight with a price target of $200, down from $215.
The analyst says the shortfall in fiscal Q1 and the gap between its forecasts and the recovery needed to meet management's guidance indicate increased earnings risk over a longer period than was expected, according to a note pulled by thefly.com.
“The company will need to earn almost $17 in earnings per share in the next three quarters to hit guidance despite several market and idiosyncratic headwinds ahead," the analyst said.
TD Cowen lowered FedEx’s price target to $328 from $334 and affirmed a buy rating. The Q1 results "fell well short” of the investment firm's estimate and consensus expectations, it said.
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TD Cowen's earnings estimates for FedEx now lag the low end of the company's updated guidance due to concern about current trends and how the results are likely to be distributed in the second half of the year.
Baird analyst Garrett Holland lowered its FedEx stock price target to $320 from $340 but maintained an outperform rating. The analyst recommends buying the shares during the post-earnings selloff.
The fiscal Q1 report was much weaker than expected, and the first half of fiscal 2025 is "clearly challenging," the analyst said. He added that investors can take advantage of "resurfacing fears" to build positions in the stock since he sees potential cyclical tailwinds in 2025 and effective execution to improve margins over the next few years.
Related: Veteran fund manager sees world of pain coming for stocks
