12:11 PM EDT, 09/20/2024 (MT Newswires) -- FedEx ( FDX ) likely faces a "greater earnings risk" over the long term than previously expected, given the extent of its fiscal first-quarter miss and a potentially steep recovery path, Morgan Stanley said Friday.

Late Thursday, the parcel delivery company reported first-quarter adjusted earnings of $3.60 a share on revenue of $21.6 billion, both missing Wall Street's views for $4.77 and $21.91 billion, respectively. "Our results reflect a challenging (first-quarter) demand environment, which was weaker than we expected, particularly in the US domestic package market," Chief Executive Raj Subramaniam said on an earnings conference call, according to a Capital IQ transcript.

For fiscal 2025, the company projects non-GAAP EPS at $17.90 to $18.90 before certain retirement plan adjustments, compared with its previous outlook of $18.25 to $20.25. After excluding business optimization costs, the outlook was pegged at $20 to $21, lowering the high end of its previous range from $22. FedEx ( FDX ) now expects full-year revenue to increase by a low-single digit year over year, compared with its previous forecast of a low- to mid-single-digit gain.

"We were circumspect into the print, but the magnitude of the shortfall, and the large gap between our forecasts and the recovery trajectory necessary to meet (the) management's guidance, suggests greater earnings risk over a longer horizon than we had envisioned," Morgan Stanley said in a note to clients. The company will need to post nearly $17 in EPS in the next three quarters to meet the guidance amid "several market and idiosyncratic headwinds ahead," the brokerage wrote.

FedEx's ( FDX ) contract with the US Postal Service is scheduled to expire later this month, likely leaving "a large revenue hole" next quarter, Morgan Stanley said. Although FedEx's ( FDX ) management sounded confident in their ability to convert big surcharges levied this peak season, the brokerage said it remains "skeptical about dramatically raising pricing on customers who are already trading down or disintermediating parcel carriers from their commerce supply chains."

Morgan Stanley downgraded its rating on the FedEx ( FDX ) stock to underweight from equal-weight and cut its price target to $200 from $215. The company's shares were down 14% in Friday trading.

The previously announced assessment of FedEx's ( FDX ) freight business is "well underway" and on course to be completed by the end of the calendar year, Subramaniam told analysts. The business provides less-than-truckload transportation services as a separate subsidiary of the company.

The review of the business is not expected to create as much value for the stock as envisaged by the market amid a possibility that the process won't "reach the conclusion the market wants," Morgan Stanley said. The brokerage expects the company's parcel business to continue to see structural challenges in terms of volume, price and mix, according to the note.

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