FedEx, a prominent player in the parcel delivery industry, is likely to grapple with a "greater earnings risk" over the long term than was previously anticipated, as highlighted by analysts from Morgan Stanley. The firm's assessment follows FedEx's disappointing fiscal first-quarter earnings report, which revealed significant misses against Wall Street expectations and indicated a potentially challenging recovery path.
On Thursday evening, the company disclosed first-quarter adjusted earnings of $3.60 per share against revenue of $21.6 billion, both figures falling short of analysts' estimates, which were $4.77 per share and $21.91 billion in revenue. Chief Executive Raj Subramaniam addressed these results during an earnings conference call, stating, "Our results reflect a challenging (first-quarter) demand environment, which was weaker than we expected, particularly in the US domestic package market." For fiscal year 2025, FedEx's projections for non-GAAP EPS have been revised downwards to a range of $17.90 to $18.90, prior to certain retirement plan adjustments, compared to an earlier forecast of $18.25 to $20.25.
Additionally, after accounting for business optimization costs, the EPS outlook has now been adjusted to a range of $20 to $21, thereby lowering the upper limit of the previous forecast from $22. The company now anticipates a modest year-over-year revenue increase, positioning their outlook to a low-single-digit growth rather than the previously expected low-to-mid single-digit gain.
Morgan Stanley expressed concerns relating to the magnitude of FedEx's earnings shortfall, suggesting that the gap between current forecasts and the required recovery trajectory to meet management's guidance indicates a heightened risk to long-term earnings potential. The investment firm noted that FedEx would need to achieve nearly $17 in EPS over the next three quarters to align with the guidance offered amidst the backdrop of "several market and idiosyncratic headwinds ahead." Compounding the challenges, FedEx's contract with the US Postal Service is set to expire later this month, which Morgan Stanley warned might create "a large revenue hole" in the upcoming quarter.
While FedEx executives expressed confidence in their capacity to convert substantial surcharges levied during peak season into revenue, the brokerage remained "skeptical about dramatically raising pricing on customers who are already trading down or disintermediating parcel carriers from their commerce supply chains." Reflecting these concerns, Morgan Stanley downgraded its overall rating on FedEx stock to underweight from equal-weight and adjusted its price target downwards to $200 from a previous $215.
The company’s shares reportedly fell by 14% during Friday's trading session. Furthermore, the anticipated evaluation of FedEx's freight business is "well underway" and is expected to conclude by the end of the calendar year, as confirmed by Subramaniam during the analysts' call. The freight segment operates as a separate subsidiary providing less-than-truckload transportation services.
However, Morgan Stanley cautioned that the implications of this review might not deliver as much value as the market had hoped, noting the potential for the process not to "reach the conclusion the market wants." The brokerage foresees continued structural challenges in FedEx's parcel business, particularly regarding volume, pricing, and service mix, outlining a cautious yet informed view on the company's immediate future prospects..