FedEx shares rose in early trading Wednesday as a number of Wall Street analysts rushed to revise their price targets for the world's second-largest package delivery company following its best fiscal fourth-quarter earnings report. than expected.
Fedex (FDX) which lost a key contract with the US Postal Service to its now biggest rival, United Parcel Service. (UPS) has focused on cost cuts and efficiencies under Chief Executive Raj Subramaniam after pressure from activist investors last year.
The group has cut its workforce in Europe and the United States and has committed to cutting about $4 billion in overall costs by the end of the next fiscal year. About half of that figure arrived at the end of the current year.
However, overall shipping volumes, particularly those generating wider profit margins, have largely stagnated over the past year amid a sluggish global economy, persistently high inflation, and the USPS contract liquidation at the end. this fall.
FedEx was still able to produce a 7.2% gain in March quarter earnings, to $5.41 per share, well above Wall Street forecasts. Overall revenue rose just 1% from a year earlier to $22.1 billion.
Operating margin improved about 4 percentage points to 8.5%, and about a quarter of that gain came from continued cost cuts.
FedEx cost cuts 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 profits toward the high end of our original guidance range.”
“Our transformation process will continue in fiscal 2025, as we build on the team's extraordinary progress,” he added. “I have never been more confident in our future, as we create the most flexible, efficient and intelligent network in the world.”
Looking at the current financial year, FedEx sees earnings in the region 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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Cost cutting will likely remain the main driver of recovering profits to pandemic-era records, given persistent weakness in demand, Third Bridge analyst Anthony de Ruijter said.
“Industry overcapacity remains a key issue facing the company and will need to be addressed to take results to the next level, but in the meantime, FedEx is managing the current macroeconomic environment well,” he added.
Is FedEx Freight available?
Another key aspect of the market's reaction to FedEx's earnings update is linked to discussions that the group could look to sell its freight division.
“Our management team and board of directors, together with external advisors, are conducting an assessment of FedEx Freight's role in our portfolio structure and potential steps to further unlock sustainable value for shareholders,” Subramaniam said. . “We are committed to completing this thorough and deliberate review by the end of the calendar year.”
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Evercore ISI analyst Jonathan Chappell said the plans were a “real boost” to the overall earnings report and a statement that “gives credence to a sum-of-the-parts upside potential given much higher multiples at similar prices.” (less than a truck) franchises.”
“We believe the key to FDX's investment thesis is the continued execution of its Drive savings program and a smooth consolidation of the Ground/Express businesses, rather than relying on a macro that is increasingly uncertain,” Chappel said . He raised his FedEx price target by $21, to $339 per share, following last night's earnings update.
“While neither, but especially the latter, is risk-free, recent progress in execution points to the guidance range remaining achievable throughout the year,” he added.
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JP Morgan's Brian Ossenbeck also highlighted the potential benefit of the freight division assessment, 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 transformation at FedEx appears to be gaining momentum.”
Other price target changes come from analysts such as TD Cowen's Helane Becker, who raised hers by $15 to $335, and Wells Fargo's Christian Wetherbee, who raised hers by $25 to $300.
FedEx shares rose 13.5% in premarket trading to indicate an opening price of $290.96 each, a move that would extend the stock's gain in 2024 to around 15%.
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