FedEx Margins Show Progress, but International Yields Disappoint

FedEx Stock at a Glance

• Fair Value Estimate: $218
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow

FedEx’s FDX fiscal fourth-quarter revenue fell 10% year over year as volumes continued to decline across all segments. Yields in its Express division flipped negative on tough comparisons, along with excess airfreight industry capacity and an 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 (less than truckload, or 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. Despite the challenging climate for package volume, with help from aggressive cost rationalization, ground margins were up 210 basis points year over year to 12.1%, ahead of our 11% forecast. Express’ adjusted margin was still down year over year, but it 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-$18.50, compared 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.

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 fair value estimate. In recent quarters, FedEx shares have risen on optimism over the company’s turnaround efforts, and they now trade in fairly valued territory.