LOS ANGELES – FedEx Corp. has shaken investor confidence in the new chief executive’s vision for a long-awaited turnaround at the shipping company, sending its shares into free fall after withdrawing its full-year earnings guidance last week.
After Raj Subramaniam replaced founder Fred Smith as CEO of FedEx in June, the Tennessee company generated goodwill by issuing stronger-than-expected full-year earnings guidance and increasing its dividend payment.
Investors, already frustrated by last year’s overly optimistic estimate for the holiday season, were disappointed by the Sept. 15 earnings warning. By the close of trading this week, FedEx’s stock price had fallen more than 28% from Subramaniam’s first day as CEO, as investors questioned FedEx’s ability to forecast.
“You can’t say things are good, make recommendations, increase the dividend, and then tear shareholders apart,” said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas.
FedEx said it will discuss global economic prospects and results for the quarter ended Aug. 31 in a conference call after the market close on Thursday.
Reuters spoke to Bradshaw and five other investors, who bought FedEx stock when it looked cheap relative to its more profitable and better-performing competitor United Parcel Service UPS.N, believing a transformation of FedEx’s business promised healthy returns. Achieving that vision now seems further away than they had hoped.
Most of these investors, including one that sold most of its holdings in January, still believe FedEx can ultimately generate higher profits by shedding assets, cutting costs and merging its independently operated Express and Ground businesses.
But patience is waning, especially after UPS executives stood by their own forecasts this month.
Asked if last week’s warning had shaken his confidence in FedEx’s new CEO, Bradshaw said: “100%. I wish I owned more UPS and forgot about FedEx.” Bradshaw said the company holds around 15,000 shares across accounts.
“So Bad It’s Good”
Investors agree that business conditions are deteriorating on the back of weaker e-commerce demand, rising inflation and the ever-recurring COVID lockdowns in China. But most believe FedEx’s pain was largely self-inflicted, noting that it has failed to ground planes, close corporate offices and reduce unnecessary work hours fast enough to offset the downturn.
“The drop in profitability is at odds with the more modest drop in sales. The numbers aren’t entirely accurate,” said David Katz, chief investment officer at Matrix Asset Advisors in White Plains, New York, which holds about 58,000 FedEx shares.
Katz remains optimistic about FedEx long-term, but he and other investors want to hear from executives Thursday about what went wrong and how they will fix things.
Analysts and investors have focused on the deterioration at FedEx Express, where a deflationary pandemic e-commerce bubble is weighing on demand for lucrative air freight shipments from Asia to the United States, a business where the company has a larger footprint than UPS Has.
When FedEx said last week that Express’ first-quarter revenue would fall by $500 million, Deutsche Bank analyst Amit Mehrotra estimated that it would translate into a similar profit decline. He said in a research note that the one-for-one decline implied a “worrying inability” to manage spending.
The silver lining was that the news highlighted FedEx’s challenges. “‘It’s so bad, it’s good’ to make it even clearer that a much more dramatic overhaul is needed,” said Mehrotra.
FedEx also said last week that it was grappling with express service challenges in Europe, where its costly and troubled TNT integration stretches into its seventh year since the deal closed in 2016.
FedEx warned that business conditions would deteriorate in the current quarter, which ends with the start of the important holiday season for parcel delivery. Warnings from FedEx and others in the global freight market have cast a shadow over the year-end holiday shopping season.
FedEx said revenue from its US ground delivery business in the first quarter missed company targets by $300 million. Over the past year, the company overestimated growth for the 2021 holiday shopping season, damaging relationships with independent delivery companies and leaving investors questioning whether FedEx can effectively model demand.
Late last month, FedEx told Reuters it was optimistic about its “stress-tested” holiday forecast for this year.
Trip Miller, chief executive of Memphis-based hedge fund Gullane Capital Partners, said he doesn’t blame FedEx for its missteps but instead secured gains by selling more than 90% of its shares in January amid warnings that demand was slowing.
“You’re not turning this ship fast,” he said.
Bärtlein reported from Los Angeles; Freed from Sydney.