FedEx's annual guidance reduction could raise some quality concerns, while its plan to spin off its freight operations lacked key details, Morgan Stanley said in a note e-mailed Friday. Late Thursday, the parcel delivery company reported mixed fiscal second-quarter results and lowered its full-year outlook.
The company is facing a challenging demand backdrop and headwinds such as the US Postal Service (USPS) contract expiration and the timing shift of Cyber Week, Chief Executive Raj Subramaniam said on an earnings conference call, as reflected in a FactSet transcript. FedEx achieved $540 million in savings under its DRIVE program in the second quarter and is on track to deliver $2.2 billion in incremental savings by 2025, Subramaniam mentioned.
The company's revised full-year outlook reflects continued uncertainty around the demand environment, he added. 'The earnings volatility continues at FedEx with the big first-quarter miss followed up with a better second quarter, albeit mostly consistent with consensus expectations,' Morgan Stanley remarked in a note to clients.
'We continue to see headwinds from inflation in the cost avoidance items of the DRIVE buckets as the cycle ramps, potential double-counting in USPS savings and caution around Europe turnaround expectations.' FedEx stated late Thursday that creating a new publicly listed less-than-truckload company will allow for more customized operational execution as the global parcel and LTL markets evolve.
This strategic move is anticipated to unlock significant shareholder value, with each independent company expected to be well-capitalized, Subramaniam informed analysts. The new entity is expected to continue to operate under the FedEx Freight name. The company’s shares saw an increase of 1.7% during Friday's trading session.
'The spin announcement continues to reflect deep, close ties between FedEx parcel and FedEx LTL, which raises the question of how independent the two entities will actually be,' Morgan Stanley wrote. 'The process is expected to take 18 months, at which point LTL valuations could look very different, and we don't know what the free float is likely to be.' There remains uncertainty around the potential financials of FedEx LTL as an independent entity, the brokerage added.
Morgan Stanley maintained its underweight rating and a $200 price target on FedEx stock..