FedEx Earnings: Package Segment Margins Show More Progress, but Guidance Disappoints

Morningstar’s Metrics for FedEx

• Fair Value Estimate: $261.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of FedEx’s Earnings

FedEx’s FDX fiscal-third-quarter consolidated revenue grew 2% year over year on business-to-consumer package volume strength, partly offset by industrial sector weakness for the freight division. Federal Express' profitability continued to improve in the quarter.

Why it matters: US domestic package volumes grew 6% (ahead of our expected run rate) thanks to a solid uptick in residential ground activity. That said, less-than-truckload segment (freight) revenue and margins missed our forecasts on stubbornly soft volume/tonnage.

• Drive-related efficiency initiatives continue to take hold as Federal Express' package margin improved 90 basis points year over year (roughly in line with our forecast), despite lost leverage from the expired United States Postal Service contract and lower international export yields.

The bottom line: We expect to lower our $261 DCF-derived fair value estimate for FedEx by 2%-4%, due primarily to tempering our medium-term freight segment revenue and margin assumptions.

• The shares have been trading in fairly valued territory relative to our longer-term free cash flow forecasts, though we expect selling pressure on March 21 given disappointing guidance.
• We note that US tariff action creates significant uncertainty for US consumer spending and industrial production, adding downside risk to our forecasts. That said, we expect management’s ambitious productivity initiatives to continue bearing fruit for the flagship Federal Express division.

Coming up: Because of persistent industrial sector weakness for business-to-business package activity and LTL volumes, along with sticky cost inflation and heightened macroeconomic uncertainty, the firm tempered its fiscal 2025 outlook.

• Management now expects consolidated revenue to come in flat to down (previously flat), with adjusted EPS of $18.00-$18.60 per share (previously $19.00-$20.00). Updated EPS guidance compares with previous FactSet consensus of $18.93.