FedEx Earnings: Margins Show Additional Progress, but International Yields Disappoint

FedEx’s FDX fiscal fourth-quarter (ended May) revenue fell 10% year over year as volumes continued to decline across all segments, while express yields flipped negative on tough comparisons, as well as excess airfreight-industry capacity and unfavorable mix for international export business. Revenue came in shy of our expectations because of worse-than-expected yield declines at express and a sizable drop in freight (LTL segment) volumes.

On the other hand, consolidated adjusted operating margin came in slightly ahead of our forecast on better-than-anticipated ground margin improvement. Ground margins were up 210 basis points year over year, to 12.1%, ahead of our 11% forecast and despite the challenging package-volume backdrop, with help from aggressive cost rationalization. Express’ adjusted margin was still down year over year, but improved sequentially, to 5% from a disappointing 1.2% last quarter, thanks to ongoing network adjustments, which we expect to provide incrementally greater benefits as fiscal 2024 progresses.

Management established fiscal 2024 guidance, calling for adjusted EPS of $16.50 to $18.50, which compares with FactSet consensus near $18.30. Behind this, the firm expects flattish to slightly higher revenue, with adjusted margins improving at express and ground, but deteriorating at freight as the LTL backdrop normalizes.

Directionally speaking, we’ve been baking similar trends into our model, but our total revenue forecast for fiscal 2024 will come down because of Express’ worse-than-expected international-priority yield performance in fiscal 2023. Our margin forecasts will likely remain intact. We do not expect to materially alter our $218 DCF-derived fair value estimate. In recent quarters, the shares have risen on optimism over FedEx’s turnaround efforts, and now trade in fairly valued territory.