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FedEx’s warning is a ‘black mark’ on CEO Raj Subramaniam, strategist says

Argus Director of Portfolio Strategy John Eade joins Yahoo Finance Live to discuss FedEx's dire profit warning and how it affects the CEO's reputation as chief executive.

Video Transcript


BRIAN SOZZI: All right, let's continue to follow this fallout over at FedEx. And let's bring in John Eade over at Argus. John, good to see you. As always, look, this has been this is a disaster quarter. Disaster pre-announcement from FedEx. Total reset of guidance. What should investors be doing here?

JOHN EADE: Well, yeah, Brian, it hurts on the guidance, for sure. But this is also a black mark on the brand new CEO, right? He came on a quarter or so ago replacing the legendary Fred Smith. There was an activist investor, you know, rattling sabers. So the company is gonna be focused more on shareholder returns, less on capital expenditures.

They did a big boost to the dividend. They announced a big share buyback, changes to the board, changes to the compensation policies. All of that really excited investors. And now, here we are a quarter later and it's the Asian economy, its troubles in Europe, it's missing expectations. So it's really the same old, same old for FedEx. And I think that's a big part of the disappointment this morning.

BRAD SMITH: What should some of the customers and business partners expect as FedEx is announcing some of these cost initiatives? You know, is that going to be factored into the prices that customers, and those business partners I was mentioning, are paying? Because that would lead to me, if I'm seeing a reduction in flight frequencies, temporarily parking aircraft, things of that nature that are going to help FedEx, that's also going to be at the detriment to me, the consumer, at the end of the day, too.

JOHN EADE: Absolutely, Brad. If you look at even last quarter, their revenue was up 8% year-over-year. That sounds great. But volume was down 11%. So they're only getting that on higher prices. And now, I think they've said in the announcement this morning that volume trends had weakened at the end of this latest quarter and remain weak going into the current quarter.

So if they're gonna have any growth at all, it's gonna be on higher prices. And as they focus also on that bottom line and cut back on some of the service levels and the capital expenditures, customers are gonna be paying more and maybe getting a little bit less high quality service for the next couple of quarters. That's a tough message.

JULIE HYMAN: John, it may be a tough message. Maybe also still having a buy rating on this is a tough message? I don't know. I mean, you know, you guys are still overweight on this stock, right? You still have a buy on this stock. Are you optimistic that tough message is gonna be accepted by FedEx clients.

JOHN EADE: Well, yeah, good point. And we still do have a buy on it. You know, the news came out last night. We'll be reviewing everything for sure.

But one message that also came out from the company, and this is that they set these five-year goals in June with the new CEO. Five year goals of high teens compound annual earnings growth, 20% shareholder returns every year. And the company said, it remains committed to those goals.

It also is focusing on less capital expenditures. And it's gonna be accelerating its share buybacks. So they didn't make any change to their strategic goals. And if they're gonna be able to hit them, you know, you've got a very low share price to be buying into that program right now. So those are some of the things we're going to be thinking about, you know, as we review our estimates and rating.

BRIAN SOZZI: John, I think a lot of investors right now in our platform are reading the FedEx news as bad for UPS. Is that a fair comparison? Or should these two companies not be put in the same boat anymore because FedEx is not operating that well and maybe UPS is doing a little bit better?

JOHN EADE: I would say UPS is doing a little bit better. And I'd give a lot of credit to the new CEO at UPS, Carol Tomé, who came over from Home Depot and has focused on margins, has focused on the dividends, has focused on the employees and the service level. UPS is-- you know, they're probably gonna come in at the low end of their range, right? It's hard to buck these global volume problems.

But I do think UPS is in a better situation right now, operationally, than FedEx. Although, the FedEx stock might be a better value here, certainly based on the price action this morning.

BRIAN SOZZI: John Eade, Director of Portfolio Strategy at Argus, always good to see you. Have a great weekend.

JOHN EADE: Thank you.