Analysis – FedEx investors frustrated with new CEO after forecasts were cut.

After Raj Subramaniam took over from founder Fred Smith as FedEx CEO in June, the Tennessee-based company showed good intentions by issuing a better-than-expected full-year earnings forecast and increasing its dividend payout.

Investors, already frustrated by overly optimistic forecasts for last year’s holiday shopping season, were surprised by the Sept. 15 earnings release. By the weekend, FedEx’s stock price had fallen more than 28% from its level on his first day as CEO of Subramaniam, as investors questioned his predictive ability.

“You can’t just say things are going well, give guidance, increase dividends, and then blow up shareholders,” said Gary Bradshaw, portfolio manager at Hodges Capital Management Dallas.

FedEx said it will discuss its global economic outlook and results for the quarter ended Aug. 31 on Thursday’s post-market conference call.

Reuters spoke to Bradshaw and five other investors who said they believed FedEx’s restructuring promised healthy profits and invested in more profitable and better-performing rival United. I bought FedEx stock when it looked cheap compared to Parcel Service. The realization of this vision seems much further away than they hoped.

Most of these investors, including those who sold most of their stakes in January, are willing to cut assets, cut costs and combine their independently operated express and ground operations. , I still believe that FedEx can ultimately generate higher profits.

But patience is running out, especially after UPS executives confirmed their own guidance this month.

Asked if last week’s warning had shaken FedEx’s confidence in its new CEO, Bradshaw said: “100%. I wish I had more UPS and forgot about FedEx.” Bradshaw said the company holds about 15,000 shares across accounts.

SO BAD IT’S GOOD

Investors agree that the business environment is deteriorating due to declining e-commerce demand, skyrocketing inflation and intermittent COVID-induced lockdowns in China. But most believe that FedEx has mostly been hit hard by grounding flights, closing offices and cutting unnecessary work hours to compensate for the slowdown. .

“Lower profitability is more likely to be a factor than 20%,” said David Katz, chief investment officer of Matrix Asset Advisors White Plains, N.Y., which owns about 58,000 shares of FedEx. “It doesn’t match the modest revenue shortfall. The numbers don’t quite match.”

Katz is confident of FedEx in the long run, but Katz and other investors want to hear more from management on Thursday about what went wrong and how they plan to fix it. ing.

Analysts and investors are watching the deterioration of FedEx Express. For FedEx Express, the bursting of the pandemic’s e-commerce bubble is hurting demand for lucrative air shipments from Asia to the United States.

When FedEx announced last week that Express’ first quarter revenue would fall by $500 million, Deutsche Bank analyst Amit Mehrotra estimated that this would lead to a similar decline in earnings. In his research notes, he said the one-to-one decline implied a “worrying inability” to control spending.

On the bright side, the news highlights challenges for FedEx. “It’s a very bad thing, but a good thing, in the sense that it makes it even clearer that a more drastic overhaul is needed,” he said.

FedEx also said last week that it is struggling with express service challenges in Europe, where a costly and troubled consolidation of TNT continues in the seventh year since the deal was closed in 2016.

FedEx has warned that business conditions will worsen this quarter, which ends just as the critical Christmas parcel delivery season begins. Warnings from FedEx and other players in the global freight market have overshadowed the year-end shopping season.

FedEx said first-quarter revenue from its U.S. ground delivery business fell short of the company’s target by $300 million. Last year, the company overestimated its 2021 Christmas season growth and soured relationships with independent delivery contractors, prompting investors to question whether FedEx could effectively model demand. was

Late last month, FedEx told Reuters it was confident in its “stress-tested” vacation forecast for this year.

Trip Miller, managing director of Memphis-based hedge fund Gullane Capital Partners, said he didn’t blame FedEx for the mistake, but that FedEx took profits by selling more than 90% of its stake in January. Stated. was down.

“They aren’t moving this ship fast,” he said.

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