FedEx Slides on Downgrade - TheStreet

FedEx Slides on Downgrade

Shares drop a day after a disappointing earnings report.
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(FDX) - Get Report

shares slid in the wake of Wednesday's second-quarter earnings report, dropping 3.6% on Thursday after being downgraded by Raymond James.

After FedEx missed Wall Street estimates, William Fisher, Raymond James analyst, lowered his rating to market perform from outperform. A number of other analysts issued negative comments on FedEx and adjusted their earnings estimates, as Wall Street grows concerned that the express shipping business, FedEx's major source of revenue, is losing share to rival


(UPS) - Get Report


While Fisher and others note that FedEx is exceeding expectations in its attempts to cut costs and will have a strong second half of fiscal 2004, the fact that the company's domestic express overnight volumes dropped 2.4% in the second quarter gave cause for concern.

"The effective deceleration in the flagship express business in what we viewed as a better economic period tempers our outlook," said Fisher, "and we believe it will be difficult for the shares to outperform until a real reversal is seen here."

In recent reports, analysts have been touting the fact that FedEx has more leverage when the economy improves than rival UPS. But with FedEx losing some market share and paying out higher pension costs in the second quarter, analysts say FedEx's advantage in a recovering economy may be much less than is currently expected.

"We believe FedEx will have limited operating leverage to an economic pickup relative to UPS," said Daniel Hemme, analyst at Prudential Equity Group. "Our view stems from a material cost disadvantage in pickup and delivery operations for FedEx."

Furthermore, Legg Mason analyst John Larkin warned that the earnings growth FedEx showed in the second quarter may be misleading due to the charges and write-offs associated with its voluntary retirement program.

In Larkin's view, the 87-cent per-share profit FedEx announced in the second quarter is actually 82 cents a share if the costs of the head-count reduction plan are factored in. That would be a penny higher than the 81 cents a share FedEx had in the year-ago quarter.

"On an apples-to-apples basis, without the head-count reduction program benefits included in the second-quarter results, the company had virtually a flat quarter," said Larkin. "We thought the employee buyout/early retirement program would confuse the short-term number. It has done precisely that."

As a result, many analysts continue to prefer UPS, especially after UPS shares traded down in tandem with FedEx's after Wednesday's earnings miss. With nearly half of the analysts covering UPS rating it a buy vs. a third doing the same for FedEx, UPS' position as Wall Street's favorite shipping company is solidifying.

"We thought FedEx's report was a strong positive for UPS because we believe it illustrated that FedEx was losing some ground and air business to UPS, while pricing remained relatively firm in the marketplace as FedEx yields were better than we expected," said Wolfe, adding later that he "would recommend buying UPS stock prior to its fourth-quarter earnings report."

But FedEx had some defenders out there, like Merrill Lynch's Ken Hoexter, who told investors that the company's cost-cutting efforts would boost earnings to offset the second-quarter shortfall. Other bulls, like Lehman Brothers analyst Jennifer Cooke Ritter, told investors that Wednesday's 4.5% stumble was not warranted and that earnings were "net neutral." That said, Ritter advised investors to buy FedEx in the mid-$60s, where valuations are more attractive.

On Thursday, in reaction to the analyst notes, shares of FedEx dropped $2.58 cents to $68.43, while UPS dropped 50 cents, or 0.7%, to $73.04.

(All of the analysts said that no part of their compensation "was, is or will be directly or indirectly" affected by their investment opinion.)