- Management is committed to improving profitability which is nearly half that of UPS
- Have cost reduction plans to take out over $6bn in costs from 2023-2025
- 2nd Quarter is expected to be very weak with consensus EPS for Q2 expected to be down 40%
- eCommerce growth is a secular tailwind for the industry
- Tight consumer budgets are a short-term headwind
𝟯𝟲𝟬 𝗥𝗼𝘂𝗻𝗱: 𝗙𝗲𝗱𝗘𝘅 🚚
🎥 Will $FDX 𝘥𝘦𝘭𝘪𝘷𝘦𝘳 on earnings? @KungFuInvestor & @CharlesSchwab’s Lee Bohl share their expectations for the report and outlook for the stock amid the holiday season with @NPetallides: https://t.co/uFTZ43mxH5
— TD Ameritrade Network (@TDANetwork) December 20, 2022
Focus on profitability
Founder and former CEO Fred Smith was focused on expansion but his recent retirement marks a new sea change for FedEx. The quasi-new management team (came from within Fedex) is tasked with a focus on a more capital disciplined future – FDX profitability is nearly half that of UPS. There is lots of room to close this profitability gap. Management has to prove that it is capable of doing so. Their first misstep was a bullish analyst day in June and then in September announced demand fell off a cliff. They need to regain credibility from investors.
They have two significant cost reduction programs:
- One to hit in FY23: $2.2-2.7bn cost reductions ($1bn being permanent) – we need color on the cost cutting progress: reduce flight frequencies and temporarily parking aircraft; reducing labor hours inline with volume reductions; consolidating sort operations in Ground; reducing Sunday operations; deferring staff hiring; $1.5-1.7bn from express; $350-500m in ground; $350-500m overhead
- The other is scheduled to ramp-up through FY24 and 25- take an additional $4bn in costs ($1.1bn in ground; $1.4bn in express and $1.5b in overhead)
Good relative value
FDX shares have rarely been cheaper relative to the market. They’ve already declined by more than 50% on a relative basis to the S&P 500 and that is typically where FDX bottoms on a relative basis in industrial recessions. That doesn’t mean that it can’t go down if the S&P goes down, but on a relative basis, this looks like a good entry point.
Capacity was tight heading into this contraction, but we are seeing load factors stabilize. Capacity coming out should put a floor under FDX as an early-cycle name. We’d typically expect to see shares of FDX bottom roughly 6 months before the bottom in the rate of change of industrial production.
Are you bullish or bearish on FedEx?