FedEx Shareholders May Be Hit With A 'Transitional' Year In 2016

• The share price of FedEx Corporation (NYSE: FDX) has declined 15.59 percent over the last six months, from $184.98 on June 11.
• Bernstein’s David Vernon has maintained a Market Perform rating on the company, while lowering the price target from $168 to $160.
• Vernon believes that the Ground business is key to the long case on the stock, based on expectations that this higher return segment would grow faster than the other segment.

According to the Bernstein report, “The performance at Ground – where B2C trends are more meaningful, and where investor sentiment has historically been the highest – will be increasingly important as the more B2B / Freight heavy LTL and Express segments are expected to see near term challenges due to the macro.”

Analyst David Vernon mentioned that the annualized margins in the Ground segment continue to be robust, although they have been under pressure from the peaks seen in F1Q13, despite solid volumes and strong price, ex-fuel.

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“On a unit cost basis, and adjusting for accounting / integration / one-time costs as best we can, the largest source of pressure at FDX Ground looks to be coming from the purchased transportation line item,” Vernon stated.

In addition, there appear to be expansionary costs pressuring the segment, with FedEx in the process of completing meaningful facility and hub expansion. There also are integration costs impacting the Ground business.

Vernon expects 2016 to be a “transitional year” for the company. How the company emerges through this transition would depend on whether it can stabilize Ground margins to instill investor confidence in the bull case.