The world's largest parcel delivery service, FedEx Corporation (NYSE :), has taken an unexpected turn. After underperforming last year, the stock is now on the rise.
Indeed, the Memphis, Tennessee-based freight and logistics company is proving to be one of the best bets in the stock market during the COVID-19 pandemic.
Over the past three months, the transportation giant's shares have risen by more than 50%, gaining 14%. The stock closed at $ 183.53 on Friday, up more than 6% for the day.
Investors have become bullish on the stocks, encouraged by the growing demand for the company's delivery services during the pandemic, as shoppers have turned to e-commerce during lockdowns and an overall home environment.
Fortunately, the restructuring of FedEx – planned before the pandemic – proved to be a great launch pad in this new environment. Before COVID-19 spread around the world, the company had already switched to a seven-day service model, expanded its capacity for larger packages, introduced new routing software, and started pushing more Express packages to the cheaper Ground network.
Those changes helped the company increase profits from a deluge of residential parcels, while the lucrative business delivery service suffered during the US lockdown.
Escalating Ground Deliveries
The company also showed that FedEx is well prepared to respond to this new situation. Earnings for the quarter ended May exceeded analyst expectations by a wide margin, as the Ground unit's sales rose 20%.
Home delivery accounted for 72% of the division's sales by volume, compared to 56% in the same period a year earlier.
Before the pandemic, FedEx struggled to gain investor confidence. The main concern in keeping them on the sidelines was the ongoing problems the European company faced after the costly acquisition of Dutch courier service TNT in 2015. That deal did not deliver the value investors hoped to see.
Integration challenges and the slowing European economy had cast doubt on the benefits of the TNT deal, with some analysts questioning the wisdom behind this massive venture. But the global health crisis has changed business dynamics, giving management an opportunity to change the business.
"I expect customers will pay more for prices in November and December in the future, and I think that will be a structural shift in the market," said Brie Carere, FedEx Chief Marketing Officer in a conference call with analysts in June.
Along with soaring sales on the ground, the company has managed to keep costs under control with a mix of job losses, reduced incentive compensation, aircraft retirement and delays on some planned investment projects.
After these steps, analysts are back to FedEx stocks. In a note last week, financial services firm Stephens named the shipping company as the best idea and raised its target price from $ 180 to a Street high of $ 215.
“The current setup for FedEx is arguably the best since mid-2013. During that time, a number of internal initiatives combined with an improving macro backdrop eventually led to a series of positive estimate revisions and a doubling of inventory over the next 18 years. months, "said the note.
"We see a number of similarities today, and yet the stock remains stubbornly bound despite increasingly positive demand and price anecdotes."
Of the 28 analysts investigating the stock, 21 have given it a buy rating and 7 recommend it as a hold. Despite these optimistic sentiments and the recent rebound, FedEx stocks are still significantly below their five-year high of $ 274.66, which was reached in early 2018.
Bottom Line
FedEx is clearly one of the beneficiaries of the pandemic boom in e-commerce. These macro trends are likely to continue, allowing the company to ease the pressure on its cash flow and make the case for additional gains in its stock price.
