Stifel upgrades FedEx to Buy as cost saving initiatives take effect

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Stifel upgraded FedEx Corporation (NYSE:FDX) to a Buy rating (from Hold) and raised the price target on the stock to $222.00 (From $171.00) following emerging consensus around an inventory bottom, as well as two significant cost savings initiatives.

Management laid out an initial $2.7 billion cost-cut target in September 2022, announcing another $1B in savings in December, bringing the FY23 target to $3.7B, of which $1B should be permanent.

$1.7B is to be carved from the company’s “Express” service, primarily via a 9% reduction in transatlantic flights and 17% reduction in routes between Asia and Europe in addition to reconfiguring the European Express ground network. The company’s Ground service is expected to see $500M in FY23 cost savings generated from consolidating sort centers, canceling expansion plans, and reducing Sunday operations at 170+ locations. The parcel delivery service is also closing nearly 140 FedEx office locations and at least five corporate office facilities.

FedEx’s DRIVE Program is targeting $4B in structural cost reductions by FY25 across Express, Ground, and Shared and Allocated Overhead Expenses. The efficiency improvement program has been framed into 14 focus areas, each led by an executive sponsor and measured acutely to track financial and service progress.

Analysts wrote in a note, “We’ve been vocal about what we felt were significant operating deficiencies at FedEx in recent quarters, but at least some of the conditions that we laid out for getting more constructive have started coming to fruition, including pull-forward and early progress on FY23 cost takeout initiatives. There’s still a market uncertainty and management still has work to do, but at current valuation levels, we believe the risk/reward offers upside potential for FDX shares, which could grow as more progress is made with productivity initiatives. Some of the DRIVE program measures are still “show me” stories, in our view, so there could be additional opportunity from our numbers. For now, we are adjusting our FY23, FY24, and FY25 EPS estimates from $13.60, $16.65, and $19.00 to $13.74, $16.29, and $19.27, respectively. Our new target price is $222.”

Shares of FDX are up 2.15% in pre-market trading on Thursday.