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U.S. economy beginning to show 'genuine reasons to be concerned': Analyst

Stifel Global Logistics Analyst Bruce Chan joins Yahoo Finance Live to discuss FedEx's profit warning and how the logistics company compares with rival UPS.

Video Transcript

[AUDIO LOGO]

RACHELLE AKUFFO: Well, as we've been following, FedEx missing revenue estimates and pulling full-year guidance has some on the street slashing price targets. In a new note this morning, we heard from Stifel. They downgraded FedEx from buy to hold and lowered price targets from $288 to $195.

Well, joining us now is one of the authors of that new note, Bruce Chan, Stifel Global Logistics Analyst. So, Bruce, as you were sort of parsing through the information that you got from FedEx, what stood out to you that led to this downgrade?

BRUCE CHAN: Great. Yes, well, first of all, thank you very much, Rachelle, for having me here. You know, we've heard a lot today, certainly, and over the past few weeks and months about questions in the macro. And I think FedEx, in their release last night, echoed some of those concerns with their global volume warning.

But I think it's really important to parse out the rest of the announcement, which was on top of a 7% headline revenue miss, you had a close to 40% operating profit miss. So clearly, there's something going on the cost side there at FedEx. And that's really what we focused on in terms of the downgrade and thinking that what is going on in the company is a bit idiosyncratic.

SEANA SMITH: So, Bruce, you downgraded the stock. You cut your price target by nearly $100 to $195 a share. I guess, to what extent-- how bad could it potentially get?

BRUCE CHAN: I think when you look at trough on trough earnings, you know, there's probably $150 as our kind of bear case scenario. So it could get-- it could get worse. You know, again, I'd come back to the profit warning and the volume warning there and that discrepancy between where the miss was in the headline numbers.

You know, I do think that, again, this is more of an internal struggle with FedEx. It's more of an internal issue around their TNT integration and gave us a lot less confidence in management's ability to number one, navigate the potential storm that's coming, but also a lot of the strategic initiatives that they laid out in their recent capital markets day.

DAVID BRIGGS: So just to be clear, you would argue this is more a FedEx problem than a global problem. And what does it mean for UPS, and perhaps even Amazon, if anything?

BRUCE CHAN: Yeah, I think there are two things that are important to point out here. Number one, there are some concerns about the macro and the volume picture out there. I would expect that UPS and DHL and other companies out there are seeing some volume pressure.

But, again, if you look at what happened with EBIT and the 40%-- near 40% miss on earnings, most of that, I think, is attributable to the company there. So I think we'll see some potential pressure on top-line volume growth. But I don't expect to see anywhere near the type of earnings and profit pressure that we've seen from FedEx.

RACHELLE AKUFFO: So, Bruce, why do you think the markets are reacting this way on this FedEx news then?

BRUCE CHAN: I think there are a lot of people that are nervous about what's going on right now. As I said, there are genuine reasons to be concerned about the macro picture, the energy situation and inflation pressure in Europe, and certainly what's going on in China. And I think there is a tendency to want to attach, you know, what happened with FedEx to that situation and see it as sort of the harbinger of doom. I think they're separate events.

SEANA SMITH: Hey, Bruce. So you still have a buy rating, I believe, on UPS. What sets UPS apart from FedEx here? Why do you think they're better positioned? Is it the fact that they have already taken some cost-cutting measures into account?

BRUCE CHAN: Yeah, I think that's a big part of it. UPS has shown, under the leadership of their new CEO, Carol Tomé, that they've done a much better job with capital allocation, with cost efficiency, and, on top of that, with a commercial pivot. They've been focusing a lot more on high-yield business, on SMB business. That's a playbook that FedEx has essentially tried to replicate, but they've been further behind, and they haven't shown nearly the same type of progress that UPS has shown.

DAVID BRIGGS: One of the things that really caught my eye that Raj Subramaniam said is, quote, "We are a reflection of everybody else's business." And we go back to Greenspan, who used that FedEx, really, barometer of the entire economy. Is there's still truth to that?

BRUCE CHAN: There is, but I think investors need to remember that FedEx is going through a transformational period in its history. It recently purchased TNT Express over in Europe. That was a major transaction. We're getting to the end of a multi-year integration period. And I think it's clear that that process hasn't gone as well as the company had hoped.

The company, you know, recently got a new CEO. Fred Smith, legendary founder, is taking a step back, so there's new leadership at the helm. And, you know, I think the market has changed. FedEx has pivoted from being the upstart in the ground share market.

It's pivoted more towards a yield-first approach, as UPS has done. So the company is going through transition. And, again, I think that's what we're seeing reflected in the results last night and not so much what's happening with the broader economy.

SEANA SMITH: FedEx having its worst day on record here, off just about 22%. Bruce Chan of Stifel, thanks so much for joining us.