FedEx Caused Markets To Panic... Briefly

FedEx's shares recently plummeted by 12% after the company reported disappointing results and outlook, leading to a series of price-target reductions by Wall Street analysts, which contributed to a late-day sell-off in the broader market.

  • The quarterly operating income of the air-based Express unit experienced a 60% decline, influenced by unstable macroeconomic conditions, subdued restocking by retailers, and a decrease in demand from its largest client, the U.S. Postal Service (USPS). More packages have been shifted by the U.S. Post Office from the more profitable air services to ground services.
  • The decline in earnings for the Express segment came as a surprise to analysts, who had expected the cost-cutting measures announced earlier in the year to partially counterbalance the reduction in business from USPS.

Barometer Of Growth

It is perceived that FedEx acts as a barometer for global economic trade. Yet, specific issues within the global delivery giant, especially its Express delivery business, were pointed out by investors on Wednesday as the main reasons for Wall Street's disappointment.

  • Danni Hewson, head of financial analysis at AJ Bell, commented that the Fed's tightening regime was bound to have a delayed impact, and that they had observed numerous companies constricting their spending over the past year to become more efficient and resilient in anticipation of any downturn.
  • Over the past year, the U.S. Federal Reserve and other global central banks have significantly increased rates to tackle inflation. However, some, including the Fed, are now hinting at potential rate cuts in the near future.

Raj Subramaniam, CEO of FedEx, observed that global industrial production remains weak, as reflected in the company's Express Freight numbers and even in domestic Express statistics.

Normalisation Of Volumes

Morgan Stanley analysts, in their commentary, expressed disagreement with attributing the situation solely to cyclical or macroeconomic factors. They pointed out that FedEx and UPS are still grappling with the normalisation of volume and pricing trends post-pandemic.

  • FedEx's decline on Wednesday was on track to erase about $8 billion from its market valuation.
  • At least five brokerages reduced their price targets, with BoFA Global Research making the largest cut of $21 to $313.

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