On Thursday, FedEx was downgraded from positive to neutral and dropped their price target from $211 to $192. Susquehanna analyst Bascome Majors point to a slowing global economy, increasing capital expenditures, and a length integration with TNT Express as reasons for the downgrade.
FedEx faces challenges going forward
The previous year has been difficult for FedEx. The company’s shares are down by nearly 30 percent in a year-to-date analysis.
So what can investors expect from the package delivery company going forward? There are a couple hurdles the company will need to tackle if they hope to see their stock rebound.
FedEx’s 2016 acquisition of the European delivery service TNT Express was a costly expenditure for the company. Though it boosted the company’s international presence, the integration process has been slow and expensive.
And in 2017, TNT’s network suffered a cyber attack which cost FedEx a report $400 million. FedEx CEO Rajesh Subramaniam said the company remains confident about the long-term value of TNT Express and has expressed the need for patience.
But analysts stress that successful integration will be an important driver for FedEx’s stock shares going forward.
Capital spending requirements
E-commerce growth provides FedEx with an opportunity to increase both their delivery volume and revenue in the coming years. But many people question whether the company will be able to increase its margin as much as they need to.
And if they do, it’s unclear how this increased spending will affect their free cash flow. It’s a good idea for the company to re-invest in the business but this could cause their stock to remain sluggish for the time being.
High costs and a lengthy integration with TNT are proving to be a challenge for FedEx. Plus, the company has to deal with the ongoing effects of the trade war and Amazon’s plans to begin shipping packages.
According to Majors, that there are few indicators the stock will be rallying anytime soon. In order for the company to see a higher valuation, FedEx will need to prove they can deliver EPS growth that is in line with historical norms. They will also need to provide a plan to free cash flow improvement.