The Ratings Game: Wall Street loves FedEx’s cost cuts and plans to combine networks. But here’s where some analysts say it could get messy
Wall Street analysts heaped praise on package-deliverer FedEx Corp.’s plans to slash more costs and bring its ground and air-shipping services under the umbrella of a single company — even if the implications for logistics and labor remained question marks.
on Wednesday said it would bring its air, ground and services businesses into a single company, Federal Express Corp., in June 2024. The reorganization, he said, would simplify how customers do business with the company. And executives said that along with efforts to cut $4 billion in costs by fiscal 2025, other efforts to tighten up its delivery network could save an extra $2 billion in fiscal 2027.
Raymond James, in a note on Thursday that featured the rare literal exclamation from a Wall Street analyst, said that “undeniable change is afoot” at FedEx, adding that the changes were likely to boost earnings and margins.
“After being involved with FedEx for ~20 years, it feels different,” they said. “While FDX’s cost-cutting initiatives and margins goals are not necessarily new, the company’s watershed announcement to consolidate its Express & Ground units into a single network was!”
They upgraded the stock to its version of buy. Shares of FedEx finished 0.9% higher on Thursday.
The excitement follows a broader about-face for FedEx’s investors. Shares plunged in September, after FedEx executives warned of weaker shipping demand, leading to some questions about their ability to lead the company. But the stock later rebounded, as management got more aggressive on cutting costs and scaling back operations.
“What was most interesting to us was the company’s announcement of an Express and Ground network integration—one of the key operational differentiators between itself and rival UPS for most of its history, in our view,” Stifel analysts said in a note on Thursday.
Stephens analyst Jack Atkins said the changes could unlock “meaningful” value for investors in the coming years — even if the reorganization might come with logistical questions.
“While the integration of its two parcel companies (Express and Ground) into one operating entity comes with execution risk and some key unanswered questions (like who will be delivering the packages…employees or contractors), we believe the potential cost savings and profit improvement from this program could eventually surpass the $6 bil. in savings outlined at the DRIVE event if fully successful by FY27,” he said.
Stifel, as well, also said the approach wasn’t without risks to investors and to the bottom line overall. Analysts there said fusing together different logistics networks was often messy. They also said that the combination opened the possibility for unionization among FedEx workers.
“Historically, FedEx has lobbied successfully for classification of its Express business under the Railway Labor Act (RLA), making the bar for organization much higher, while fending off organization at its Ground Division (classified under the National Labor Relations Act), via an intricate and litigation-hardened independent contractor model, in our view,” they said.
“We believe this network integration could heighten the risk of unionization, which we estimate could carry a 30% labor cost structure premium to non-union.”
Over the past 12 months, FedEx stock has climbed 13.8%. By comparison, the S&P 500
is down about 9% over the past year.