FedEx price target trimmed to $303 amid USPS contract loss

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On Wednesday, Stifel adjusted its outlook for FedEx (NYSE:), reducing the company’s stock price target from $306.00 to $303.00, but still maintains a Buy rating on the stock. The revision follows FedEx’s announcement that it will not renew its long-standing domestic air linehaul services agreement with the United States Postal Service (USPS), set to expire on September 29, 2024.

The contract, reportedly worth about $2 billion, will instead be serviced by rival UPS.

FedEx is in the process of a multi-year network rationalization effort, which aims to increase the efficiency and profitability of its operations. The termination of the USPS contract, which was possibly a low-to-no profit deal providing only base load density, is seen as a move that could lead to a denser and more profitable network in the medium term. The company’s ongoing major network realignment may mitigate the impact of losing such a significant volume of business.

UPS, having secured the USPS air cargo contract, may find the additional volume beneficial for increasing network density. Still, the company’s existing efficient operations may offer limited room for additional optimization. The challenge for UPS will be to manage this growth without losing focus on smart capital allocation.

The loss of the USPS contract is expected to have a near-term negative effect on FedEx’s network density and profitability. The contract previously enabled FedEx to utilize its expensive air assets more frequently. Despite this setback, the ongoing network realignment at FedEx is anticipated to minimize the significance of the lost contract over time.

Stifel’s adjusted price target reflects the immediate financial implications for FedEx due to the end of the USPS agreement. The firm’s Buy rating indicates a continued positive long-term outlook for FedEx’s stock performance despite the recent developments.

InvestingPro Insights

In light of Stifel’s revised outlook for FedEx, current data from InvestingPro provides additional context for investors considering the company’s stock. FedEx has a robust track record of dividend reliability, having raised its dividend for 3 consecutive years and maintained payments for 23 consecutive years.

This consistency may appeal to income-focused investors. The company’s stock is currently trading at a low P/E ratio of 15.72, which could suggest that it is undervalued relative to its near-term earnings growth, especially when considering the adjusted P/E ratio of 13.96 for the last twelve months as of Q3 2024.

Moreover, with a market cap of 68.22 billion USD and a PEG ratio of 0.31 for the same period, FedEx presents a potentially attractive growth at a reasonable price scenario. Despite the recent downturn in revenue growth, with a -5.51% change over the last twelve months as of Q3 2024, the company’s status as a prominent player in the Air Freight & Logistics industry and its low price volatility might offer a sense of stability for investors.

For those seeking further insights and detailed analysis, InvestingPro offers additional InvestingPro Tips on FedEx. These tips delve into aspects such as earnings revisions, profitability forecasts, and industry positioning. To access these tips and more, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 5 more InvestingPro Tips available, providing a comprehensive understanding of FedEx’s financial health and market position.

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