FedEx’s e-commerce business looks strong in the coming years: analyst

Allison Poliniak-Cusic, Wells Fargo Securities Senior Analyst, joins Yahoo Finance Live to discuss how FedEx is faring amid the pandemic and the outlook for freight rates post-COVID.

Video Transcript

BRIAN SOZZI: FedEx shares are under pressure despite the transport giant beating analyst earnings forecast last night. Company's founder Fred Smith warned about the labor shortage and vowed to hike Capex spending moving forward to help support the company's growth. Allison Poliniak-Cusic is a senior analyst at Wells Fargo and covers FedEx.

Allison good to see you on this Friday. How concerned are you about what Fred Smith was saying in terms of the labor shortage, and do you think because of it FedEx won't be able to meet peak demand levels?

ALLISON POLINIAK-CUSIC: Hi. Well, first, thanks for having me, Brian. And I would say the labor issue isn't unique to FedEx. It's been a pretty pervasive as we talk to companies across the industrial platform. I think there is some level of optimism that starts to ease in the second half. They're working towards that. And I would say it's not just through rising prices. It's working to leverage their network more efficiently. All areas are on fire to try to improve their productivity in the face of these labor challenges here.

JULIE HYMAN: And of course, Allison, it's not just the labor challenges. It's also just capacity-- other types of capacity all through their operations, right? Whether it comes to warehouses, whether it comes to trucks, airplanes, et cetera, et cetera, and they've said they're going to boost spending to address that. Is their spending plan adequate? Do you think that they're doing the right thing and deploying it as strategically as they need to be?

ALLISON POLINIAK-CUSIC: Yeah, I would say on the capital spending-- consistent 22 capital spending will be about 8% of sales, so in that range that they target. They noted half of that would be tied to those capacity expansions. You know, increase automation, infrastructure, so forth, so to enable them to handle that increase in volume.

E-commerce structurally stepped up during the COVID pandemic and still is at elevated levels, and it doesn't appear that's abating any time soon. And the forecasts are for it to continue to grow over the next five years, so they're incrementally adding capacity. That's certainly the right thing to do. Automation is going to be incredibly important in terms of increasing that throughput and time in transit for them as well.

BRIAN SOZZI: Allison, I'm sure you picked up on this. On the earnings call last night, the company said it is the quote, "the new normal that peak surcharges are going to be here." From a consumer standpoint I don't want to pay any more for deliveries. I think a lot of deliveries are, in fact, high as they are. But from an analyst standpoint, is that a good thing that FedEx really has endless pricing power?

ALLISON POLINIAK-CUSIC: Well, I would say it's not just FedEx, right? It's across the transport networks. Capacity certainly has been well documented in terms of the limitations here. And it was really giving them the capability of fine tuning that lens, improving revenue quality. Is that next package that's going on your network, is that the package you want and is it being priced appropriately for the cost that you're taking in? So I would say, from your perspective, those shipping costs will remain elevated at least for the next 12 months in our view.

JULIE HYMAN: Well, and it's also, are you getting what you pay for? I mean, if you look at FedEx's on-time performance, I was seeing some stats that it's 88% versus above 95% for UPS, and I can say on an anecdotal basis that I have had issues with some of my FedEx executed deliveries. Are they doing enough on that front? Is that a labor problem? And if it's a labor problem why are they having the labor problem and, say, UPS isn't?

ALLISON POLINIAK-CUSIC: Well, I would say it's kind of going back to that next package that you want on your network and that's something that they talked about addressing going forward here. It's something that they recognize has been a problem with their network. It's really now focusing on pushing back a little bit on shipper's, and I think we've seen some of that come through in terms of, you know, you're clogging our networks.

Maybe we're not getting appropriately compensated for that. So let's kind of push, reoptimize. I think there's been some news over the past few weeks about that. FedEx sort of starting to push back a little bit on shippers and saying we need to sort out the operations. Our system's getting overloaded here, hence the reason for the capacity additions going forward.

BRIAN SOZZI: It is interesting to see the market reaction. About two weeks ago, Allison, UPS had its big investor day. The stock got hit and maybe the market didn't like its longer term operating margin guidance. Here, FedEx earnings, the stock gets hit. Which stock is the better one to own?

ALLISON POLINIAK-CUSIC: At this point in the cycle, we're looking at FedEx over UPS. Right now, today, as we noted in our note weekly buyers on the weakness this morning.

BRIAN SOZZI: Lastly, too, there are a lot of hands, a lot of cooks in the kitchen on these FedEx earnings calls. Is there any signs or indications on when founder Fred Smith might hand off the leadership baton?

ALLISON POLINIAK-CUSIC: Yeah, I mean, to you and I both, I'm not quite sure but it would certainly be up to him and the board to decide. But at some point, yes, I would imagine he would step aside here.

BRIAN SOZZI: All right, we'll leave it there. Allison Poliniak-Cusic, senior analyst at Wells Fargo who covers FedEx, good to see you this morning. Have a great weekend.