FedEx Move To 7-Day Ground Delivery Will Have Costs Before Revenue Gains

The boom in online buying is again forcing a big shipper to expand its service, and that's going to mean more cost.

FedEx Corporation FDX announced on Thursday ground-parcel delivery unit FedEx Ground will add Sunday delivery, starting in January. The move comes just months after FedEx added Saturday delivery.

But it will cost money before it boosts the bottom line, analysts say, and FedEx competitor United Parcel Service, Inc. UPS may have to match the move.

FedEx also said it will speed up its effort to move last-mile delivery into its own network, rather than outsourcing that final part of the delivery to the Postal Service.

'Necessary Steps'

"There is no doubt in our mind that FDX (and UPS) and their customers will need to invest in expanding their service capabilities to keep up with Amazon.com, Inc. AMZN raising the bar on eCommerce delivery expectations,” Morgan Stanley’s Ravi Shanker wrote in a note. “We believe these are necessary steps to remain competitive but note that costs will weigh on results before any potential revenue gains show up.”

Up to now, FedEx Ground had only done seven-day delivery during the peak Christmas delivery season.

The extra cost of adding Sunday delivery will kick in just as FedEx is lapping the extra cost it took on when expanding from five to six-day-a-week delivery this past January.

Shanker has an Equal-Weight rating and $143 price target on FedEx.

Macro Worries

Countering the additional shipping needs of the online buying shift are uncertainties over trade and the global economy, warned Bank of America Merrill Lynch analyst Ken Hoexter. He said the bank's transportation conference in mid-May that consensus estimates for 10 percent growth at FedEx may be at risk given global trade worries.

Hoexter lowered EPS estimates for the fourth quarter of 2019, and full year 2020 and 2021, accounting for the slowing macro backdrop, and the seven-day startup costs.

Hoexter reiterated a Neutral rating on FedEx, lowering the price target from $188 to $173.