Higher wages stemming from a constrained labor market and a slowdown in customer demand due to the pandemic impacted FedEx’s (NYSE: FDX) financials and dragged its stock lower.
For context, labor shortages adversely impacted FedEx’s financials by $450 million, $470 million, and $350 million in Q1, Q2, and Q3. Besides labor headwinds, the resurgent virus took a toll on customer demand and, in turn, its volumes.
What’s Ahead?
While labor shortages could continue to hurt FedEx’s near-term financials, the pace of acceleration in costs has slowed, which is positive. During the Q3 conference call, FedEx’s CFO, Mike Lenz, stated that the “labor-related network and efficiency effects have diminished.”
Lenz further added that the “wage rate component should become less of a headwind” as the company laps the “onset of labor rate increases” in Q4.
In response to FedEx’s recent quarterly performance and guidance, Garrett Holland of Robert W. Baird stated that the headwinds from the availability of labor and “network inefficiencies are fading ($350M in total from $470M in FQ21), and management expects continued improvement in yields given its focus on revenue quality and ongoing re-pricing of large/medium customer contracts (~50% re-priced).”
Though the analyst remains concerned about the rising geopolitical risks, he highlighted a solid parcel pricing environment and recovery in 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 kept his Buy rating on FDX stock. Ease sees the recent decline in FDX shares as an investment opportunity.
Bottom Line
FedEx’s challenges are temporary and will likely fade soon. Meanwhile, its differentiated portfolio and diverse customer base bode well for growth. FedEx continues to invest in enhancing its network and has expanded its e-commerce capacity to capitalize on growing demand.
On TipRanks, FedEx stock has received 18 Buy and three Hold recommendations for a Strong Buy consensus rating. Further, the average FedEx price target of $295.75 indicates 23.3% upside potential from current levels.
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