FedEx Provides Color on Cost Initiatives; Express and Ground Networks to Consolidate

During its investor event, FedEx FDX provided incremental color surrounding its ongoing Drive and eventual Network 2.0 programs, which target significant structural cost savings. To bolster its Drive efforts, the firm announced it will consolidate Express and Ground—which are currently run separately—into a fully integrated air/ground network by June 2024. The less-than-truckload segment (Freight) will remain independent. This was new information for us (and probably for investors), but as we understand it, management was already anticipating the move as part of its network transformation.

Management continues to target $4 billion in structural cost savings from Drive initiatives by fiscal 2025 (ending May 2025), with an incremental $2 billion of permanent cuts by fiscal 2027 from Network 2.0. Overall, it sounds like the firm is aiming for $100 billion in revenue with a 10% adjusted operating margin over the “medium term,” when including benefits from an eventual return of volume growth, modest yield gains, and Drive-related cost savings. Its revenue target—and thus its margin outlook—will depend heavily on the timing of the recovery in global package delivery demand, which is facing a pullback in retailer restocking, normalizing e-commerce, sluggish global trade, and loosening airlift capacity.

Our model has already been assuming cost savings and modest yield and volume growth translating into healthy margin improvement in fiscal 2024 and fiscal 2025. Additionally, the consolidation plan gives us more confidence in FedEx’s ability to secure permanent cost cuts thanks to reduced network redundancies. However, we don’t expect to materially revise our forecasts, given lingering execution uncertainty and elevated macroeconomic risk. Thus, we are maintaining our $218 discounted cash flow-derived fair value estimate. In recent quarters, the shares have risen on optimism about FedEx’s turnaround efforts and now appear fairly valued after being undervalued previously.