FedEx Corp. (FDX) is slumping Tuesday morning on disappointing earnings, but experts say its downturn could stem moving forward by positive e-commerce trends. For example, FedEx recently announced plans to move to six-day-a-week deliveries as it becomes an ever-growing delivery service for online retailers.
Credit Suisse analyst Allison Landry called this tailwind for the company "obvious at this point," seeing big FedEx investments made in preparation for more e-commerce deliveries as a major driver of future operating leverage and expanded margins. She maintained a "Buy" rating on the stock and a set a $307 price target even as FDX shares fell some 5% to $242.83 shortly after 10:30 a.m. ET.
FedEx shares are sinking after the company missed analysts' fiscal-first-quarter earnings-per-share expectations, but market watchers say that growing e-commerce and an expanded FedEx delivery system designed to handle it could turn things around. Here are some details:
A Happy Holiday?
FedEx management forecast in an earnings call Monday night that the secular trend of expanded e-commerce shipments should help generate record deliveries as the company enters the key holiday season.
"We forecast another record year, with four Mondays during the peak expected to be among the busiest days in the history of FedEx," Chief Marketing Officer Rajesh Subramaniam told analysts. "We want to support [small- and medium-sized] customers as e-commerce continues to grow and becomes a major part of their business."
FDX said it's hiring 55,000 additional employees to deal with peak-season e-commerce shipments, and Subramaniam said capital investments that the company has made position it to outpace rivals in the space.
"Our sales and marketing teams are out-executing the competition, and our pricing strategy for small customers is proving successful," he said. "To further support the influx of e-commerce volume, we continue to invest in our extensive retail network, and we will have more than 12,000 FedEx 'Hold at Location' [sites] for this year's peak season."
The company also noted that it won't charge the holiday-shipping surcharges that competitors like United Parcel Service (UPS) do during the holodays. FedEx believes that will help the company pick up market share based on price competition, along with the firm's six-day operation.
Navigating the Amazon
Online-retailing behemoth Amazon (AMZN) represents a major competitive threat to FedEx, but both management and analysts are downplaying the issue and instead highlighting the potential for cooperation between the two companies.
"Amazon is a longstanding customer of ours," Subramaniam told analysts. "While there has been significant media interest in what Amazon is doing to expand their in-source delivery capability, this should not be confused as [being] competition with FedEx."
Subramaniam believes that Amazon can't eclipse the logistics and infrastructure that FedEx has built over 40 years, adding that it wouldn't be fatal if FedEx one day loses Amazon as a customer if the online giant switches to in-house shipping. After all, the executive noted that Amazon isn't FedEx's biggest customer and represents less than 3% of current revenue.
Analysts are also nonchalant about Amazon as a FedEx competitor.
"We see upside to FDX's average valuation as the perceived threat of Amazon subsides," J.P. Morgan analyst Brian P. Ossenbeck wrote in a research note, expressing his confidence that FedEx shouldn't feel overly threatened.