FedEx Earnings: Global Package Demand Still Sluggish, but Ground Margins Impress

Key Morningstar Metrics for FedEx

• Fair Value Estimate: $222.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of FedEx’s Earnings

FedEx’s FDX fiscal first-quarter (ended August) revenue fell 7% year over year on persistent volume declines and falling yields at Express, along with normalizing less-than-truckload, or LTL, tonnage at Freight. Express’ softer package activity stems in part from muted retail sector restocking and lost business from the United States Postal Service, which recently tweaked its delivery strategy.

Revenue came in slightly shy of our expectations, mostly due to yield pressure at Express, including the steep correction in demand-driven surcharges. That said, Express’ volume declines are easing, core pricing at Ground still looks healthy, and Ground volume trends flipped positive (up 0.6%) thanks to easier comps and customers diverting shipments from UPS UPS due to the threat of a Teamsters strike.

On the profitability front, a key takeaway is that adjusted Ground margin came in well ahead of our forecast (and likely buy-side expectations), rising 480 basis points year over year to 13.3%. Importantly, the firm’s ambitious cost rationalization efforts are gaining traction, and we suspect volume wins from UPS aided operating leverage. We expect the stock price to react favorably to this. Although it’s still depressed, Express’ adjusted margin rose slightly year over year. Freight’s margin fell as the LTL backdrop is normalizing, though diversions from failed competitor Yellow should prove to be a tailwind.

Management expects flattish revenue in fiscal 2024, but it raised the bottom end of its adjusted earnings per share guide by $0.50—now calling for $17.00-$18.50—likely because of incremental leverage from share gains from UPS and good traction with cost efforts. The still-sluggish demand backdrop keeps us cautious, but we’ll probably tweak our medium-term margin forecasts for Ground upward, albeit slightly. We expect this adjustment to boost our DCF-derived $222 fair value estimate by 2%-4%. The shares have jumped in recent quarters and are currently trading in borderline overvalued territory.