FedEx Wins Over Wall Street With $6 Billion Cuts, Gains on UPS

While United Parcel Services Inc. reels from the fallout of a costly labor fight this summer and a tough parcel market, FedEx Corp. is reaping the benefits.

(Bloomberg) — While United Parcel Services Inc. reels from the fallout of a costly labor fight this summer and a tough parcel market, FedEx Corp. is reaping the benefits.

Shares of FedEx have soared 75% from a low point a year ago, as investors eye a $6 billion cost-cutting plan that aims to streamline operations and reduce the number of workers on staff. FedEx’s Wall Street luster has only increased as its main rival confronted a strike threat and eventually agreed to a five-year deal with $30 billion in new money for wage increases, benefits and other perks. 

As the parcel market prepares for tougher quarters ahead, the question now is whether FedEx Chief Executive Officer Raj Subramaniam can build on its newfound advantages. The company is expected to report quarterly results Wednesday that include an 8% year-over-year gain on adjusted earnings per share. But sales are estimated to drop.

“The market is giving Raj and team a chance to lower costs and improve margins,” said Helane Becker, a senior analyst with TD Cowen, in an email. “If they are successful, the stock will move up significantly.” Becker has an “outperform” rating on the shares.

Squeezing Its Rival

FedEx’s stock has weathered slowing post-pandemic package demand better than its rival. UPS shares have declined 9.1% this year, while FedEx has jumped 44%. 

FedEx is expected to report earnings of $3.73 a share, up from $3.44 a year ago, according to the average of 25 analyst estimates compiled by Bloomberg. UPS’ profit for the current quarter, by contrast, is expected to plunge more than 40% to $1.79 per share. The parcel service cut its forecast on higher labor costs and is still trying to claw back lost business from the looming strike.

FedEx’s revenue per package during the quarter that ended Aug. 31 is estimated to drop at the Express unit, but expected to rise at the Ground unit, where the company is pushing more volume. Ground drivers aren’t unionized and earn about $20 an hour on average, less than half the salary of a veteran UPS driver. FedEx’s Freight unit may also get a bump from customers of Yellow Corp., which filed for bankruptcy in early August. 

Pricing Challenges

Despite lower demand, FedEx and UPS have both said they want to maintain price discipline and announced general rate increases of about 5.9% each for next year. 

That will be hard to achieve with declining package volumes, said Satish Jindel, a consultant and founder of ShipMatrix, which gathers data on the parcel market. Discounting has already begun and Jindel expects pricing to drop about 5%, instead of continuing to rise.  

FedEx and UPS “aren’t going to have success with the kind of big charges that they’ve had in the last two, three years,” Jindel said. “I can see it from my ShipMatrix customers — they’re getting bigger discounts.”

As package volume began to weaken last year, Subramaniam scrapped FedEx’s financial targets and announced large cost cuts. In April, he gave more details on his plans to overhaul FedEx, which the company predicts will yield $4 billion of savings and efficiencies by the end of May 2025 and another $2 billion from combining its two networks by May 2027. 

FedEx has stumbled on efficiency plans in the past. If Subramaniam can pull off his, which is called DRIVE, the shares will have a long runway for gains, said Garrett Holland, an analyst with R.W. Baird, in a Sept. 14 note.

“Structural cost savings tied to the company’s DRIVE efficiency program and network integration efforts should continue to support better relative earnings growth in the years ahead.” Holland said.

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