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The market continues to applaud
FedEx
of the
decision to drop
Amazon.com
(AMZN) among the customers of the logistics giant, Express. Bernstein thinks investors are right to celebrate.
The story back. On Friday, FedEx announced its decision not to renew FedEx Express's US domestic contract with Amazon, preferring to focus its resources on the rest of the e-commerce market. This decision comes during a difficult period for FedEx. At first, it may seem strange for a delivery company to deliberately separate from the country's largest e-commerce player.
Initially, the rise in online sales has been hailed as a boon to FedEx and
United Parcel Service
(UPS), but this dynamic has changed since then. Amazon expands its own shipping network and pushes the limits in terms of increasingly reduced shipping guarantees. This forced FedEx and UPS to spend a lot for improvements and turned Amazon from one friend to the other.
What's up. Monday, Bernstein analyst David Vernon reiterated an outperformance rating and a price target of $ 196 on FedEx. He notes that, in the short term, the FedEx move could create a bit of disruption. Even though Amazon accounted for less than 1.3% of the annual turnover, FedEx resources could be reorganized to accommodate the loss. But once FedEx has done so, its stock should be better protected from Amazon's headlines.
Look to the front. In the longer term, this pause means FedEx can focus on better performing accounts, says Vernon.
"The failure to agree on the commercial terms of this contract is as much about what FedEx will accept economically as what Amazon wants to do with its supply chain," he writes. "By eliminating, or not minimizing, a higher-level service product for a lower-yielding customer, FedEx will have more capacity to dedicate to higher-paying accounts (some of which, like
Walmart
(WMT), are more than happy not to share space in an airplane with Amazon). He notes that FedEx has refused Amazon's requests in the past and has survived, believing it would be no different.
The market seems to agree, sending FedEx shares up 2.3% to $ 161.68 in recent transactions. The fact that Amazon, despite its disproportionate reputation, ultimately contributes so little to FedEx's revenue is likely to fuel optimism and that this breakup will free up FedEx resources for better things to come.
Write to Teresa Rivas at [email protected]
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