12:00 PM EST, 12/20/2024 (MT Newswires) -- FedEx's ( FDX ) annual guidance reduction could raise some "quality" concerns, while its plan to spin off its freight operations lacked key details, Morgan Stanley said in a note e-mailed Friday.

Late Thursday, the parcel delivery company reported mixed fiscal second-quarter results and lowered its full-year outlook. The company is facing a "challenging" demand backdrop and headwinds such as the US Postal Service, or USPS, contract expiration and the timing shift of Cyber Week, Chief Executive Raj Subramaniam said on an earnings conference call, according to a FactSet transcript.

FedEx ( FDX ) achieved $540 million in savings under its DRIVE program in the second quarter and is on track to deliver $2.2 billion in incremental savings in 2025, Subramaniam said. The company's revised full-year outlook reflects "continued uncertainty" around the demand environment, he added.

"The earnings volatility continues at (FedEx ( FDX )) with the big (first-quarter) miss followed up with a better (second quarter), albeit mostly consistent with consensus expectations," Morgan Stanley said in a note to clients. "We continue to see headwinds from inflation in the 'cost avoidance' items of the DRIVE buckets as the cycle ramps, potential double-counting in USPS savings and caution around Europe turnaround expectations."

FedEx ( FDX ) said late Thursday that creating a new publicly listed less-than-truckload company will allow for more customized operational execution as the global parcel and LTL markets evolve. The move will help unlock "significant" shareholder value, with each independent company expected to be "well-capitalized," Subramaniam told analysts. The new company is expected to continue to operate under the FedEx Freight name, he added.

The company's shares were up 1.7% in Friday trade.

"The spin announcement continues to reflect deep, close ties between (FedEx ( FDX )) parcel and (FedEx ( FDX )) LTL, which raises the question as to how independent the two entities will actually be," Morgan Stanley wrote. "The process is expected to take 18 months, at which point LTL valuations could look very different, and we don't know what the free float is likely to be."

There is also uncertainty around potential financials of FedEx LTL as an independent entity, the brokerage added. Morgan Stanley maintained its underweight rating and a $200 price target on the FedEx ( FDX ) stock.

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