Baird Analyst Garret Holland joins Yahoo Finance Live to discuss FedEx's earnings beat in a strong Q2 earnings report and the courier's ability to increase shipping rates in a period of e-commerce growth.
- We were just talking about those FedEx numbers and the big reaction that the stock is having. It's up 8% after earnings and sales beat analysts' estimates. And the company's been raising prices. That's because, as I mentioned, everybody needs to move their stuff around. So FedEx has some pricing power here.
Garrett Holland is joining us now. He's an analyst at Baird who covers the stock and covers logistics more broadly. Garrett, so interesting here just the reliance upon FedEx and the fact that it does have these levers it can pull in terms of pricing. Do you think it's going to continue to be able to do so? And what does the pricing power look like going forward?
GARRETT HOLLAND: Well, thanks for having me, Julie. Yes, it's encouraging to see FedEx results last night. You know, very strong report relative to low expectations.
So $4.83, clearly topped the consensus. And as you noted, part of that was driven by the pricing strength yields of 11% and express which carry the quarter. But pricing power also looks durable for the ground business, as yields increase 9%. So the November surcharges certainly helped.
You've got another general rate increase set to kick in early next year. So pricing power and parcel looks durable and that's a function of the strong supply/demand imbalance that should continue given the healthy growth in e-commerce.
- Garrett, I'm going to resist my urge just fire off stock questions to you on FedEx. But one thing that caught my interest was they recently have received 111,000 job applications. I mean, how much do these jobs pay? And why is FedEx getting all these applications?
GARRETT HOLLAND: It's an important development, Brian. And recall the labor shortage was a clear headwind in fiscal Q1, but also in the second quarter. The ground margin was a bit light of expectation, but pressured by the labor headwinds.
So it's important to get that staffing right. It's great to see the inbound application flow structurally higher than what the company was seeing in May, and confidence in getting that labor piece of the equation correct should drive both higher margins, year over year in the first half of calendar '22, to that double digit level. So that's a key piece.
Inflationary pressure is real. And FedEx has to be competitive in the marketplace as labor shortage is one of the key bottlenecks that's driving the supply chain congestion broadly.
- And sort of on a related question, what I was talking about with the pricing power, is this as good as it gets, for not just FedEx but the sort of shipping industry, because of the anticipated shift back to services from goods, if and when it ever actually happens? I mean, is this sort of peak for these guys?
GARRETT HOLLAND: It's a good question, and the peak cycle concerns have weighed on transports over the course of '21. Now for parcels specifically, FedEx would argue that they are levered to secular growth in e-commerce, from a baseline of 2020, the domestic parcel market is set to grow 70% by 2026.
Now, clearly there's going to be a remix in spend from goods back to services, hopefully, as we get a true economic reopening. But that secular tailwind from e-commerce growth is a clear positive. To your point about parcel pricing, those gains should moderate.
But what's important to note here is that FedEx offers structural margin opportunity. Chairman CEO, Fred Smith, on the call last night, cited massive margin improvement at the company. And that's a longer term structural opportunity beyond some of the cyclical risks that you just identified.
- Garrett, how would you grade how management has done over the past two years of the pandemic?
GARRETT HOLLAND: Look, it's not easy to construct or operate these networks. And I think frustration was running a bit high last quarter as the labor pressure, I think, caught some investors by surprise, and the company lowered its fiscal '22 outlook.
But this company has weathered, not only the pandemic, but this challenging peak season very well and is pulling the levers as it relates to price, but also injections of capacity to meet customer demand. And the fact that they reset the '22 outlook higher as well as implemented a nice share buyback program, and also announced a June investor day, gives investors confidence that management understands how to improve profitability and meet this growth opportunity.
- And to that point, with earnings growth at FedEx looking like it's accelerating the new buyback, do you sell out of UPS if you own it and go into FedEx? What's the better stock to own?
GARRETT HOLLAND: We favor FedEx at current prices. And remember, the key point here is the cyclical backdrop for FedEx remains favorable. They're talking about improving profitability in the first half of calendar '22. But there's structural margin opportunity, and UPS has talked about that with their "better not bigger" strategy.
We think many of those same elements hold for FedEx and the margin opportunity is underappreciated. So with the stock trading near historic trough valuations, we continue to like the risk/reward for FedEx shares. And it's a name investors should revisit as you think about next year and the '22 outlook.
- Garrett, thanks so much. Appreciate it. We'll talk to you soon. Garrett Holland, analyst at Baird who covers FedEx and logistics. Appreciate it.