FedEx earnings: How the UPS labor fight may boost results

FedEx (FDX) is set to report its fiscal first quarter earnings after the market close on Wednesday. Citi Research Global Head of Transportation Chris Wetherbee says he expects the shipping giant to report "decent" results given its "challenged" fiscal 2023. FedEx’s Express segment “needs the most help” according to Wetherbee, but their ground and freight have been "steady performers." FedEx will benefit this quarter, Wetherbee says, due to “a degree of market share” moving from UPS (UPS) during its negotiations with the Teamsters and Yellow's (YELLQ) bankruptcy.

Video transcript

SEANA SMITH: Another big story that we're watching-- FedEx earnings, the logistics giant, is reporting results for its first quarter on Wednesday. Now, according to Bloomberg street consensus is for revenue of $21.85 billion and adjusted earnings of $3.75 a share. Now, many analysts including our next guest remain optimistic ahead of the earnings release. You can see 19 analysts have buy ratings on the stock, 15 hold and just 1 sell. We want to bring in Chris Wetherbee, Citi Research global head of the Transportation sector. Chris, it's great to see you here. So lots of anticipation going into this report here that we're going to get from FedEx later this week. What do you expect we'll hear from the company?

CHRIS WETHERBEE: Well, we think the company is actually going to report a relatively decent fiscal first quarter. Now, you have to remember where FedEx is coming from. It had a very challenged fiscal '23 really starting about a year ago in the fall of last year when global trade deceleration really hurt their biggest business which is their Express segment.

We think a lot of that is behind us at this point. We're beginning to see some relative improvement off of what's a very low level. So in terms of earnings for the quarter, we're looking for about $4 a share, so we're a bit above consensus. And we think ultimately we're going to see OK results from Express but probably pretty good results from ground and then their freight segment which is LTL trucking.

BRAD SMITH: Is there any significance in UPS just kind of getting through and announcing their newly ratified contract just last week making sure that they've also got their logistics house in order, if you will. At the same time that FedEx, of course, different classification for their worker types, but at the same time, they have been going out it sounds like to customers and saying, hey, look at the issues that UPS is having. Now with those kind of in the rear view mirror, does that change the equation for taking on even more large contracts?

CHRIS WETHERBEE: I do think one of the things that we'll see in FedEx is fiscal first quarter is a degree of market share that moved from UPS to FedEx. Remember, FedEx's quarter was through the end of August, and UPS was going through those contract negotiations really over the course of June and July in a very sort of hot and heavy way. And so we do think there's a relatively large amount of shippers who move some degree of volume over to FedEx.

So UPS has talked about a million packages per day of diversion about a third of that going to FedEx. That'll show up in FedEx ground business, and that's part of the reason why we would expect the ground segment to report a relatively strong result. Now that's not something that necessarily can last to the same degree, the same amount of strength throughout the year. We do think that some of those customers will transition back to UPS. But in the short run, it definitely is a tailwind for FedEx as they were open for business. And I think there was some concern from customers that you could see a work stoppage at UPS, and so some risk taking off the table by moving over to FedEx.

SEANA SMITH: Chris, do you see that for the bankruptcy of Yellow that we saw in August, just in terms of the fact that they could potentially win a little bit more of market share there at least over the coming months?

CHRIS WETHERBEE: Yeah, that's absolutely right. So Yellow going out of business during FedEx's fiscal first quarter as well is going to be another tailwind. Now that has the potential to stick around for the rest of the fiscal year and really ongoing because the doors are closed at Yellow. So FedEx being the largest LTL company in the country should benefit decently from not only just shipments moving over from Yellow to FedEx but also pricing, which was strong to begin with in the LTL business but actually probably getting stronger as a result of reduced capacity.

Remember, Yellow was about 6.5% of overall shipments in the market and a little bit bigger number than that in terms of revenue. And so that capacity coming out should really tighten up the LTL market benefiting pricing, and obviously, they're getting their fair share of volume moving over to.

BRAD SMITH: Chris, you've got a new CFO at FedEx. Now, what should investors, what should viewers who are tracking this ticker every single day, what should they keep an eye on with regard to his own track record? I believe this is John Dietrich who is going to be taking over at this role. What should they be watching for in that type of financial leadership style and how that could perhaps flow through to some of the price action as well?

CHRIS WETHERBEE: So I think the addition of a new CFO is a good thing ultimately for FedEx. And I think what you're seeing here is you're bringing in an executive who's got a strong background in global air cargo market. And that again, kind of ties into FedEx's biggest business, which is the Express segment. I think that ultimately is an area where they need probably the most help. So ground and freight have been generally steady performers over the course of the last several years where Express has had significant volatility both up and during the pandemic and then down post pandemic.

And so getting a degree of stability and bringing in an executive who's got a strong track record executing in this global air cargo market I think goes a long way. Ultimately, the sort of better financial discipline to improve the company's results as well as focus on CapEx and return on invested capital are some of the things that investors are really focused on with the company like FedEx. I think is going to be a positive, so we're excited about that.

BRAD SMITH: All right, Chris Wetherbee, who is the Citi Research global head of the Transportation sector. Chris, thanks for taking the time here this morning. Certainly appreciate it.

CHRIS WETHERBEE: Thank you.