FedEx Shares To 'Take A Near-Term Pause'

Expressing disappointment with the way FedEx Corporation (NYSE: FDX) is ending 2016, Barclays’ Brandon Oglenski mentioned that while volume growth had been softer in FQ2, the operating profit performance at the Ground segment was meaningfully below expectations.

Oglenski maintained an Overweight rating on the company, with a price target of $205.

Pressures

The analyst noted that management clearly stated that cost pressures were likely to impact the performance of the Ground segment during FY 2017, as FedEx completes material capital and capacity additions.

“However, the magnitude of the Ground earnings decline on revenue growth of 9 percent will clearly add fuel to the fire of bearish long-term sentiment on lower margin ecommerce expansion,” Oglenski stated.

Near Term Pause

The deceleration in volume growth indicates that the margin pressure was largely cost-related, rather than mix-related. The analyst believes this distinction is important, since management indicated that increased revenue management initiatives was likely to slow growth in the near term.

FedEx has chosen to add more than 10 percent Ground network capacity in FY 2017, including major hub openings, and the company requires meaningful employee training and start-up costs.

“But markets can be fickle looking for validation of a long-term negative thesis on lower Ground margins, suggesting FedEx shares are likely to take a near-term pause as investors await the lapping of network investments,” Oglenski pointed out.