Analysis-FedEx Investors Frustrated With New CEO After Withdrawn Forecast

FedEx Corp dented investor confidence in the new chief executive's vision to deliver a long-awaited turnaround at the shipping company, sending its shares into a freefall after it withdrew its full-year profit forecast last week.

After Raj Subramaniam succeeded founder Fred Smith in June as FedEx's CEO, the Tennessee company generated goodwill by issuing a stronger-than-expected, full-year profit forecast and boosting its dividend payment.

Investors, already frustrated by last year's overly optimistic estimate for the holiday shopping season, were disappointed with its profit warning on Sept. 15. By the end of trading that week, FedEx's share price had slid more than 28% from where it was on Subramaniam's first day as CEO as investors questioned FedEx's forecasting ability.

"You can't say things are good, give guidance, raise the dividend, and then blow shareholders to smithereens," said Gary Bradshaw, a portfolio manager with Hodges Capital Management in Dallas.

FedEx said it would discuss the global economic outlook and results for the quarter ended Aug. 31 in a conference call after the market closes on Thursday.

Reuters spoke with Bradshaw and five other investors who bought FedEx stock when it looked cheap versus its more profitable and better performing rival United Parcel Service, believing a FedEx business revamp promised healthy returns. Achieving that vision now seems further out than they had hoped.

Most of those investors, including one who sold most of his holdings in January, still believe FedEx can eventually generate higher profits by shedding assets, slashing costs and combining its independently operated Express and Ground businesses.

But patience is wearing thin, especially after UPS executives stood by their own forecasts this month.

Asked if last week's warning shook his confidence in FedEx's new CEO, Bradshaw said, "100%. I wish I would have owned more UPS and forgot FedEx." Bradshaw said the firm holds roughly 15,000 shares across accounts.

'SO BAD, IT'S GOOD'

Investors agree business conditions are deteriorating due to softer e-commerce demand, soaring inflation and on-and-off COVID lockdowns in China. But most believe FedEx's pain has been mostly self-inflicted, noting it failed to ground planes, shutter corporate offices and reduce unneeded labor hours fast enough to offset the downturn.

"The decline in profitability doesn't reconcile with the more modest shortfall in revenues. The numbers don't fully add up," said David Katz, chief investment officer at Matrix Asset Advisors in White Plains, New York, which holds about 58,000 FedEx shares.

Katz remains confident in FedEx long-term, but he and other investors want to hear executives on Thursday detail what went wrong and how they will set things right.

Analysts and investors have focused on the deterioration at FedEx Express, where a deflating pandemic e-commerce bubble has hammered demand for lucrative air shipments to the United States from Asia, a business where the company has a larger footprint than UPS.

When FedEx said last week that first-quarter Express revenue would decline $500 million, Deutsche Bank analyst Amit Mehrotra estimated that translated to a similar drop in profit. He said in a research note that the one-for-one decline implied a "concerning inability" to manage expenses.

The silver lining was that the news clarified FedEx's challenges. "'It's 'so bad, it's good', with respect to making it even clearer that a much more dramatic overhaul is needed," Mehrotra said.

FedEx also said last week that it struggled with Express service challenges in Europe, where its costly and trouble-plagued TNT integration is stretching into its seventh year since the deal closed in 2016.

FedEx warned business conditions would worsen in the current quarter, which ends as the key Christmas package delivery season begins. Warnings from FedEx and others in the global cargo market have cast a pall over the year-end holiday shopping season.

FedEx said first-quarter revenue at its U.S. Ground delivery business would miss company targets by $300 million. Last year, the company overestimated growth for the 2021 Christmas season, damaging relations with independent delivery contractors and leaving investors wondering whether FedEx can effectively model demand.

Late last month, FedEx told Reuters it was confident in its "stress tested" holiday forecast for this year.

Trip Miller, managing director at Memphis-based hedge fund Gullane Capital Partners, said he did not blame FedEx for its missteps, but locked in profits by selling more than 90% of his shares in January as he saw warnings that demand was slipping.

"They don't turn this ship fast," he said.