FedEx Corporation (FDX - Free Report) recently announced its intention to not renew the contract with Amazon.com, Inc. (AMZN - Free Report) for providing the latter with domestic express delivery services. However, on cessation of the contract come Jun 30, the company’s relationship with the e-commerce giant will be intact with regard to international services or domestic operations at other units, such as the FedEx Ground.
With the company expecting average daily volume for small parcels in the United States to double by 2026, the decision is aimed at focusing on the broader e-commerce market. Company spokeswoman Katie Wassmer stated that it’s "a strategic decision" to target numerous other retailers, such as Target, Walgreens and Walmart.
Per Wassmer, last year, FedEx generated less than 1.3% of the total revenues from its contract with Amazon. Although insignificant, the company is likely to see a margin decline in the near-term. Meanwhile, FedEx’s rival United Parcel Service, Inc. (UPS - Free Report) accounts for a larger share of revenues from its deal with Amazon.
Cowen Research analyst Helane Becker believes, the express delivery deal with Amazon is a low-margin business and thus, removal of the contract will not exert a substantial impact on FedEx. In fact, it will allow the company to reap more benefits from the e-commerce boom and in turn, bolster its Express segment’s margins in the long run.
On the flip side, Amazon’s growing expansion into the logistics network offering discounted and faster deliveries is a potential threat to FedEx.
Zacks Rank & Key Pick
FedEx carries a Zacks Rank #4 (Sell).
A better-ranked stock in the same space is Radiant Logistics, Inc. (RLGT - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Shares of Radiant Logistics have soared more than 57% in a year’s time.
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