By Shivansh Tiwary
(Reuters) -Shares of FedEx (NYSE:FDX) sank 12% on Wednesday following dismal results and an outlook that prompted a slew of price-target cuts from Wall Street analysts and contributed to a late-day broad market selloff.
FedEx is seen as a bellwether for worldwide economic trade. Investors on Wednesday said specific problems at the global delivery giant disappointed Wall Street, particularly its Express delivery business. The overall market initially shook off the news, but fell late in the day to push the S&P 500 down.
"The Fed's tightening regime was always going to have a lagging factor and we've seen plenty of companies tightening their belts over the past year in order to be leaner and meaner heading into any downturn," said Danni Hewson, head of financial analysis at AJ Bell.
Quarterly operating income for the air-based Express unit fell 60%, hit by volatile macroeconomic conditions, muted retailer restocking and reduced demand from its largest customer, the U.S. Postal Service (USPS). The U.S. Post Office has been diverting more packages from higher-margin air services to ground services.
The drop in Express earnings surprised analysts, who had anticipated cost-cutting initiatives announced earlier in the year would offset some of the decline in business from USPS.
"FedEx's quarterly results are a step back," Deutsche Bank analyst Amit Malhotra said.
The stock lost $33.75 a share at $246.25, while shares of rival UPS fell 2.9%.
The broader S&P 500 index lost 1.5% after a steady run that left it just shy of an all-time record built on falling interest rates. In September 2022, a FedEx warning sparked a selloff in equities that lasted several weeks, but the market has been more optimistic of late.
The U.S. Federal Reserve and other world central banks have hiked rates sharply over the past year-plus to combat inflation, but some, including the Fed, have recently pivoted, and are now suggesting rate cuts will be in the offing before long.
CEO Raj Subramaniam noted industrial production around the world continues to be weak, saying that was reflected in the company's Express Freight numbers, and even in domestic Express figures.
"While it may be easy to blame this on the cycle/macro, we disagree," wrote analysts at Morgan Stanley. The brokerage noted FedEx and UPS are still struggling with "post pandemic normalization of volume and pricing trends".
FedEx's drop on Wednesday was poised to shed roughly $8 billion from its market value. At least five brokerages cut their price targets. BoFA Global Research cut its target by $21 to $313, the heftiest on Wednesday.
The stock has a median price target of $296.50, according to LSEG data.
FedEx said on Wednesday it was negotiating a renewal of the post office contract to try improving profitability from that business. TD Cowen analyst Helane Becker expects FedEx to walk away from the USPS business next year, when the contract expires.
Shares of FedEx trade about 14 times forward profit estimates, below rival UPS's 16.7 multiple.