This morning’s news that FedEx's (FDX) iconic founder and boss, Fred Smith, is stepping down from his role as CEO has been greeted warmly by the market, with the stock indicating an opening a few percentage points above yesterday’s close. I too expect to be buying the stock after the open this morning, adding to an existing long position, but the trade in my case will be more in spite of than because of Smith’s departure from this role.
Maybe I’m too emotional, but to me, it is always a bit sad when a stock jumps on a change in CEO. It is almost as if the market is telling that person what they really thought of them, kicking them when they are down. Of course, “down” is a relative word when it comes to CEOs, most of whom are paid ridiculously well, especially when ousted, that it is hard to drum up any sympathy. I’m sure Fred Smith, who will still be Executive Chairman when former COO Raj Subramaniam takes over, will be just fine.
Still, it is interesting that even someone as widely admired and as integral to a company’s culture and success as Smith can, in some circumstances, be seen as a liability by investors. FDX stock has had a rough ten months or so, hitting its high of 319.90 in May 2021 and losing 37.8% on its way to a low of 199.03 at the start of this month. That’s a pretty hefty drop.
Smith now seems to have taken the fall for that, as CEOs rightly do when things go bad, but it is hard to say that any of it is really his fault. The company has been hit by massive increases in the cost of both labor and fuel, increases caused by things way beyond the control of FedEx’s founder. What hurt the most is that FedEx has done less well at maintaining margins in that environment than its big rival, UPS (UPS). However, the way Smith has handled that may turn out to be a positive in the long run.
Paying for the staff needed to maintain growth will hurt in the short term but over time, as prices charged to customers reflect cost increases, happy, settled employees will add a lot of value. Meanwhile, a not too aggressive stance on fuel surcharges should result in happier, more loyal customers who will be less inclined to react negatively to those long-term pricing increases when they are implemented. In short, while it seems that Smith is in some ways taking the blame here, Subramaniam is actually inheriting an operation that has taken a short-term hit to set up for long-term success.
The simple fact is that FedEx is the market leader in a business that has experienced, and will continue for some time to experience, rapid growth. As the seemingly inexorable shift to online shopping continues, there is still plenty of room for expansion in the number of packages sent around the world and ultimately to people’s homes. Because of that, a strong argument can be made that not overreacting to short-term cost pressures, but rather taking a short term hit to margins in order to keep employees and customers happy, is actually a sound strategy from which the company will derive big benefits as things stabilize.
Of course, traders, whose view is inherently short-term, don’t see it that way. To them, a couple of quarters of declining margins is a worrying trend. However, with oil prices retreating from their highs and with higher prices for everything becoming just a fact of life, it is a trend that will reverse soon. That, not the change in CEO, is why I will be buying FDX this morning.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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