On Tuesday, BofA Securities made adjustments to FedEx (NYSE:FDX)'s financial outlook, reducing the company's price target from $346.00 to $340.00, while maintaining a Buy rating. The revision follows the announcement that the U.S. Postal Service (USPS) has decided to award its air cargo contract to UPS, concluding its long-standing relationship with FedEx that lasted for 23 years.
The switch, which marks the end of a significant partnership for FedEx, is expected to have a short-term negative financial impact on the company. FedEx is anticipated to experience challenges as it scales down its operations, including the decommissioning of assets and workforce adjustments that were dedicated to the USPS contract.
The contract, previously valued at $1.5 billion annually over a seven-year period, had already been reduced to minimum commitments as USPS revamped its network, leaving FedEx's business with this contract at near break-even levels.
FedEx had overcommitted to routes until September 2024, expecting a steady volume of business. However, as volumes decreased, so did profitability. The new contract with UPS is set to take effect after September 29, 2024. In response to declining profits, FedEx had previously stated it would either seek to improve profit margins and returns or exit the business to lower its operational costs.
At its peak, FedEx had expanded its operations to manage between 90-100 daily flights for USPS at its Memphis hub, a significant increase from the 30-40 flights before the contract. With the contract's revenue now estimated to have fallen to approximately $1.1 billion and break-even EBIT levels, FedEx is projected to face a quarterly impact of around $275 million, or $0.85 per share in the second quarter of fiscal year 2025.
The company is expected to adjust its cost base following this period, which should lead to financial improvements in the second half of fiscal year 2025.
InvestingPro Insights
Despite the recent setback with the USPS contract, FedEx (NYSE:FDX) remains a notable player in the Air Freight & Logistics industry, with a reputation for consistent dividend payments over the past 23 years. According to InvestingPro data, the company has a market capitalization of $68.93 billion and trades at a P/E ratio of 15.92, which is considered low relative to near-term earnings growth. Moreover, FedEx has experienced a strong return over the last month, with a 14.17% increase in total return, indicating a positive market sentiment.
InvestingPro Tips highlight that FedEx has not only raised its dividend for 3 consecutive years but also maintains a low price volatility, making it potentially attractive for dividend-seeking investors. Furthermore, analysts predict the company will be profitable this year, which could be reassuring for stakeholders concerned about the recent contract loss. For those interested in a deeper analysis, there are more InvestingPro Tips available at InvestingPro, and by using the coupon code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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