Rising wages resulting from a tight labor market and slower customer demand due to the pandemic have impacted FedEx (New York Stock Exchange: FDX) financial and dragged down its stock.
For context, labor shortages negatively impacted FedEx’s finances by $450 million, $470 million and $350 million in the first, second and third quarters. In addition to labor headwinds, the resurgent virus weighed on customer demand and, consequently, its volumes.
What awaits us?
While labor shortages may continue to hurt FedEx’s near-term finances, the pace of cost acceleration has slowed, which is a positive. During the third quarter conference call, FedEx Chief Financial Officer Mike Lenz said “work-related network and efficiency effects have diminished.”
Lenz further added that “the wage rate component should become less of a headwind” as the company outpaces the “start of labor rate increases” in the fourth quarter.
In response to FedEx’s recent quarterly performance and guidance, Robert W. Baird’s Garrett Holland said labor availability headwinds and “network inefficiencies are fading ($350 million at total vs. $470m at FQ21), and management expects continued improvement in returns given the focus on revenue quality and continued repricing of contracts with large/medium customers (~50 % repricing).”
While the analyst remains concerned about rising geopolitical risks, he pointed to a strong parcel pricing environment and a resumption of volume growth as positives.
Holland added that FedEx’s long-term potential is intact and reiterated his buy recommendation on the stock.
Echoing similar sentiments, Argus Research analyst John Eade maintained his buy rating on FDX shares. Ease sees the recent decline in FDX shares as an investment opportunity.
FedEx’s challenges are temporary and will likely fade soon. At the same time, its differentiated portfolio and diverse customer base bode well for growth. FedEx continues to invest in improving its network and has expanded its e-commerce capability to take advantage of growing demand.
On TipRanks, FedEx stock received 18 buy recommendations and three hold recommendations for a Strong Buy consensus rating. Additionally, the average FedEx price target of $295.75 indicates upside potential of 23.3% from current levels.
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