FedEx tumbles 11% after sober results; Express unit disappoints Wall Street

FedEx shares sank on Wednesday, with the rout poised to wipe off over $8 billion from its market value, after its dismal results and outlook prompted a slew of price-target cuts from Wall Street, which said its air delivery business needed improvements.

Shares of the global delivery giant fell 11.3% in morning trade as at least five brokerages cut their price targets (PT). Shares of rival UPS also fell 2%.

BoFA Global Research cut its PT by $21 to $313, the largest action on Wednesday. The stock has a median PT of $296.50, according to LSEG data.

"FedEx's quarterly results are a step back, not step forward," Deutsche Bank analyst Amit Malhotra said, while emphasizing that FedEx's Express business has consistently presented the segment with the most significant opportunity for improvement.

Volatile macroeconomic conditions, muted retailer restocking and reduced demand from the company's largest Express customer, the U.S. Postal Service (USPS) - which has been diverting more packages from higher-margin air services to cost-effective ground services - dealt a blow to the company's air delivery business.

Industrial production around the world continues to be weak and that is reflected in the company's Express Freight numbers, and even in domestic Express numbers, CEO Raj Subramaniam said on the company's conference call.

Operating income for the air-based Express unit saw a 60% drop for the quarter, resulting in overall company profits that fell short of expectations.

The drop in Express earnings came as a surprise to analysts, who had anticipated that the cost-cutting initiatives announced earlier in the year would offset some of the decline in business from USPS.

FedEx said on Wednesday it was negotiating a renewal of the post office contract with the goal of improving profitability from its business with USPS.

But TD Cowen analyst Helane Becker expects FedEx to walk away from the USPS business next year, when the contract expires.

Shares of FedEx trade about 14 times forward profit estimates, below rival UPS's 16.7 multiple.