FedEx Shares Pierce $300 Level For First Time Ever

Shares of FedEx Corp. FDX on Tuesday breached $300 for the first time in its 42-year history as a public company and closed at a record high after investment firm UBS ratcheted up its earnings-per-share forecast for the company's fiscal 2021 second quarter to $4.20 and raised its 12-month price target to $380 a share from its previous level of $320.

The Memphis, Tennessee-based titan releases its quarterly results Dec. 17, and UBS analyst Tom Wadewitz said in a Tuesday note to expect a "meaningful upside report" relative to analysts' consensus estimates on FactSet of $3.84 a share. Wadewitz's original EPS estimate stood at $3.82, in line with the median estimate of 10 analysts polled on Barchart. The high-end Barchart consensus stood Tuesday at $4.34 a share. Wall Street expects second-quarter revenue of $19.3 billion, which would be $2 billion higher than in the FY 2020 second quarter. 

Wadewitz's move comes days after Wells Fargo & Co. analyst Allison Poliniak-Cusic boosted her price target from $286 to $331. Like Wadewitz, Poliniak-Cusic expects strong results from the company when it reports results next week.

FedEx shares closed at a record $301.70, up 1.57% on the day. Shares spiked intraday to as high as $303.68 a share.

The latest positive catalyst came from a double-digit sequential jump in air freight rates from Hong Kong to Los Angeles posted by the closely watched TAC index. The increase, which coincides with the cyclical holiday peak in Asian eastbound volumes, lends "clear support" to operating margin and income at FedEx Express, the company's air and international unit, Wadewitz said in the note.

Like other all-cargo carriers, FedEx has experienced strong demand for international volumes after most passenger flights, along with the bellyhold compartments that carry much of the world's cargo, were grounded due to the COVID-19 pandemic. About half of all global freight, including about 70% of trans-Atlantic freight traffic, moves in the bellies of passenger planes.

In July, the trade group International Air Transport Association predicted that belly cargo capacity would not return to pre-COVID-19 levels until 2024. This is unfortunate news for air freight forwarders that have long relied on belly capacity because it is priced cheaper than all-cargo services and there are a wider range of available flights to choose from. Desperate for revenue of any kind, many airlines almost overnight converted main-deck passenger cabins to cargo holds. However, these configurations have not been suitable for palletized or containerized air shipments and have led to difficulties and delays in loading and unloading the goods.

FedEx has made no secret of its intent to capitalize on the tight capacity environment to gain pricing power. Meanwhile, its decades-long relationship with freight forwarders, long considered a marriage of convenience because the forwarders supplied large-scale volumes that FedEx needed to fill its freighters, appears headed for divorce due to the pandemic.

On an analyst call earlier this year, Brie Carere, FedEx's executive vice president and chief marketing and communications officer, bluntly stated that the company planned to "disintermediate" freight forwarders. Carere didn't elaborate, but it would appear FedEx wants to use its capacity leverage to effectively eliminate the middlemen and cut direct deals with shippers for premium-priced, high-margin services.

Tuesday's share price move is the latest chapter in the company's rags-to-riches 2020 saga. Kicked to the proverbial curb by analysts and many in the media after a string of weak quarters, and trading as low as $88 a share at the end of March, FedEx shares have more than tripled in less than nine months. The gains mark a stunning turnaround for an established concern that had struggled for several years. 

Along with the positive macro trends in global air commerce, FedEx's ground-delivery services have seen demand surge along with e-commerce use as the pandemic drove consumers around the world to rely on online resources to buy items. FedEx and its arch-rival UPS UPS have also benefited from what may become a multiyear swing to a seller's market for parcel-delivery services. This would, in theory, allow both carriers to significantly raise base rates and impose higher surcharges without much shipper resistance. 

The current peak holiday shipping cycle turned theory into reality as both firms pressured large customers to agree to higher rates and levied delivery surcharges as high as $5 per parcel on their highest-volume customers. With demand expected to remain elevated well into 2021, no one expects any letup in the carriers' strategies.

Because of huge volume discounts, big shippers tend to generate low-profit margins for FedEx and UPS. Unless those shippers commit to higher prices for delivery services, neither carrier will worry about shedding some, if not all, of their business. According to various experts, the days of either company willing to sacrifice margins for volume are, at least for now, over.

Mike Erickson, head of parcel consultancy AFMS, said that FedEx has recouped by "nearly tenfold" the amount of business it lost when FedEx and Amazon.com Inc. AMZN terminated their U.S. air and ground delivery relationships in 2019. FedEx has replaced Amazon's low-margin, high-cost traffic with higher-margin shipments from midsize customers that won't demand huge price breaks and will be more dependent on FedEx for a broader range of services, Erickson said.