04:17 PM EDT, 06/03/2024 (MT Newswires) -- FedEx's ( FDX ) fiscal fourth-quarter core earnings are likely to fall short of market expectations dragged down mainly by its express business, though the focus will be on its full-year outlook, which has "several moving parts and a wide range of expectations," Morgan Stanley said Monday.

The parcel delivery company is scheduled to report fourth-quarter results June 25. Morgan Stanley expects adjusted earnings of $5.12 a share, below Wall Street's views for $5.32, the firm said in a note.

Morgan Stanley said it's roughly 4% below the Street's forecast for overall earnings before interest and taxes for the quarter, led mainly by express and a "modest" miss in freight, though ground is likely to deliver a beat.

The firm pegs express EBIT at $359 million, below the Street's $435 million projection amid a "subdued" macroeconomic backdrop and a lack of material improvement in demand.

"The express miss reflects demand for parcel remaining quite tepid exacerbated by ongoing headwinds in international, (US Postal Service) contract changes and the most pronounced impact of the working days from Leap Year," the brokerage wrote. "For freight, we expect margins to be strong but fall short of high expectations primarily vis-a-vis a continued moderation in yields with volumes generally following seasonality."

Morgan Stanley projects ground EBIT at $1.19 billion, which it said would be higher than the Street's expectation for $1.15 billion, as "seasonality largely leads the charge, compounded by continued efforts" on the DRIVE cost-saving program. DRIVE is the company's effort to consolidate its operating companies into a single, integrated air-ground network.

"DRIVE program savings will continue to be a big positive catalyst in the EBIT walk for (2025) though we believe (FedEx ( FDX )) may be starting to see diminishing returns in ground and that the second half of DRIVE savings includes significant buckets of cost-avoidance, which may be harder to pull off in an upcycle/inflationary environment," the brokerage said. Morgan Stanley expects "some overlap" between DRIVE actions and USPS roll-off cost-saving measures. Accordingly, the firm expects "significantly lower" net DRIVE savings than the $2.2 billion left in the program, according to the note.

FedEx ( FDX ) is likely to guide 2025 EPS in a range of $19 to $21, though achieving that target will need "a steep ramp" given the challenges it faces in the first half of the year, according to Morgan Stanley. The firm lowered its 2025 EPS outlook to $15.81 from $15.98 while raising its 2026 estimate to $15.28 from $15.11.

"We continue to see (FedEx ( FDX )) as a revenue story rather than a cost story going forward and that normalized EPS is in the mid-teens rather than the $30 range," the firm said. Morgan Stanley maintained its equal-weight rating and a $210 price target on the company's stock.

Price: 248.41, Change: -5.55, Percent Change: -2.19