‘Simply staggering.’ FedEx hit with downgrades, price target cuts as warning shocks Wall Street.

“I’m very disappointed in the results that we just announced here, and you know, the headline really is the macro situation that we’re facing,” CEO Raj Subramaniam said, adding that the global economy was likely facing a recession, in comments to CNBC on the heels of the warning after the market’s close on Thursday.

Gloom from the global shipper was spreading, with Dow futures
YM00,
-0.82%
down more than 200 points and shares of Target
TGT,
-0.22%,
UPS
UPS,
-3.12%
and Amazon.com
AMZN,
-1.77%
all under pressure ahead of Wall Street’s open. Major index were also under pressure in Europe and Asia stocks finished weaker across the board. DHL owner Deutsche Post
DPW,
-6.18%
dropped 6% in Frankfurt and Royal Mail
RMG,
-11.36%
fell 11% in London.

Among Wall Street banks bringing the hammer down, JPMorgan cut shares to neutral from overweight, dropping their Dec. 2023 price target to $214 from $258. Lead analyst Brian P. Ossenbeck said they published a negative preview of results last week, but the shipper’s results and short-term outlook were “materially worse than expected” in the Express service, which offers guarantees on delivery times.

Ossenbeck said lack of a “freight wave” from China’s reopening appeared to hit the leading carrier in the Asia-Pacific region hard. “What is more concerning is that the results likely had a tailwind from fuel surcharges similar to the [fiscal fourth quarter of 2022], which masks the underlying weakness in the [first-quarter] results and [second-quarter] guide; it is a sobering thought to consider Express could have lost money (ex-fuel) during the quarter.”

Confirmation of a weak peak season was a blow for the entire shipping sector, but notably to UPS, although it has less Asia Pacific exposure, said the JPMorgan analyst in a note.

A similar downgrade came from KeyBanc Capital Markets, which slashed FedEx shares to sector weight from overweight. Acknowledging a move that may seem knee-jerk, analysts Todd Fowler and Carney Blake said in a note that they see a “difficult path forward [near term], particularly in light of decelerating macro datapoints combined with low confidence around management execution.

“We expect broader weakness across our coverage with indications of a lackluster start to peak shipping trends, reinforcing our selective outlook” said the analysts, who cut their full-year 2023 earnings per share outlook to $14.25 from $23.75 and to $18 from $26 for 2024.

Citigroup analysts Christian Wetherbee and Elijah Winski kept a neutral rating on FedEx, but dropped their target price to $180 per share from $225. “We’ve seen a clear trend lower in freight trends, but FedEx performance likely stands out to the downside vs. UPS, which reiterated guidance in early September, as the company has historically been challenged in rapidly deteriorating freight markets,” the analysts said.

“FedEx will expedite long-term cost-out initiatives, but we see EPS risk into the midteens, yielding short-term downside risk to shares toward $150,” said Wetherbee and Winski.

Indeed the shipper laid out several measures to combat economic headwinds, including closing more than 90 FedEx Office locations, five corporate offices, and a halt on new hiring.

Putting the company’s gloomy forecasts further into perspective, Deutsche Bank analyst Amit Mehrotra said FedEx delivered “the weakest set of results relative to expectations in our 20 years of analyzing companies (30%+ below expectations).”

Mehrota was less willing to accept economic excuses from the global shipper, noting Express profits were down nearly $500 million annually even as revenue rose. “The company did say that revenue in this segment was $500 million short vs. its forecast; but the decremental margins associated with this should not be 100%.

“This implies a concerning inability to respond with cost mitigation, which we believe is more indicative of operating execution than macro forces,” said the analyst. “And this is not the first time we’ve observed weak execution from FedEx, but the magnitude of the numbers in today’s release was simply staggering. We simply can’t explain it, even after our discussions with the company this evening.”