FedEx Earnings Preview: Ultimately, FedEx Is A Margin And Free Cash Flow Story (FDX)
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Many articles have been written on FedEx (NYSE:FDX) both on this blog and over on Seeking Alpha over the years.
As an industrial component who, along with UPS (UPS), carries and delivers the equivalent of about 3% of US GDP (that’s a stat from the early 2000s and if it has changed, has probably only grown), FedEx remains integral to US business, particularly e-commerce.
Several recent events have coincided to be a potential catalyst for FedEx stock, hopefully pushing the stock above and beyond its June ’21 high of $319-320.
The first was Fred Smith abrogating the CEO role at FedEx and assuming the Executive Chairmanship, allowing Raj Subramaniam to assume the CEO role and effect changes to the company, including rationalizing FedEx Express and probably shrinking it to a more manageable size.
The second was the emergence of AI, which is expected to help drive cost savings at data-heavy businesses and industries.
The third was FedEx’s announcement that FedEx “Drive” was going to remove $4 billion out of the FedEx cost structure, more than half of which has been completed.
Really all three of these initiatives are tied together since FedEx Express recently lost some USPS (US Postal Service) business and probably needs to see some cost rationalization, while the emergence of AI coincided with Fred Smith stepping down and FedEx trying to simplify the business and the P/L.
All of this will likely result in a better operating margin (more on this in a minute).
Thursday night sell-side consensus expectations: Fiscal Q1 ’25
When FedEx reports after the close on Thursday, September 19, consensus is expecting:
- Revenue of $21.9 billion for the 2nd consecutive quarter of YoY growth of 1%.
- Operating income of $1.67 billion for y-o-y growth of 5%.
- EPS of $4.83 for y-o-y growth of 6%.
Last quarter, FedEx generated a consolidated operating margin of 8.6%, with Ground showing good volume and yield gains. Express’s margin was 4.10% and had declined 7 of the last 8 quarters.
Freight’s margin was 21% last quarter (fiscal Q4 ’24) and has performed very well since the end of the pandemic. Here is June ’24’s earnings preview and summary, and here is March’s preview and summary too.
Valuation
FedEx is a cheap stock on a growth basis, with the 3-year average multiple (’25 to ’27) of 12x currently, for a stock that’s expected to “average” EPS growth over the next 3 years of 15%. (It’s rare to find a stock like that with a multiple that much below its growth rate. Maybe FedEx has its disbelievers or doubters.)
Free cash flow has soared under FedEx Drive and some of the expense rationalization going on. Check these numbers, using trailing twelve-month (TTM) free cash flow:
- 4-qtr avg: $3.44 billion
- 12-qtr avg: $3.0 billion
- 20-qtr avg: $2.3 billion
- 40-qtr avg: $1.0 billion
The stock is a cheap here: wait for the all-time or June ’21 high near $320 and see how the stock reacts, and if the stock moves above that, I’d say $350 is the next target. The other metric FedEx is cheap on is price-to-sales, since it still remains below 1x.
Summary/conclusion
If readers would look at the December, March, June and September time periods on the blog, you’re likely to always find a FedEx article. The parcel giant is one of America’s truly iconic companies, and Fred Smith has truly been one of America’s great CEOs.
Having followed FedEx since the late 1990s, “peak operating margin” for FedEx was usually around 10% and that usually happened through a combination of higher volume (i.e. good US economy), solid yields (which remarkably have held up solidly through the years, with FDX and the other parcel carriers able to generate mid single-digit or more rate increases), and a cooperative price on crude oil.
Today, and maybe I’m being too optimistic, but with cost rationalization around Express and FedEx “One” (the creation of one P/L and the elimination of the Statbook and the segment analysis) and potentially more cost savings from “Drive”, I do think FedEx will create a business with a 10% operating margin as the norm, and “peak margins” being higher.
Ground is now the FedEx star and Ground’s operating margin last quarter was 13.4%, and the 4-quarter trailing average was about 12%. (That’s about three times the Express margin.)
Clients hold a 1.7% position in the stock, and what I like about it is the restructuring cost initiatives, the fact that FDX is an industrial and uncorrelated to the tech and growth sectors, and it’s very well managed. A trade down through $275 would likely trigger me to add more.
None of this is advice or a recommendation, but only an opinion. Past performance is no guarantee for future results. Investing can and does involve the loss of principal, even for short periods of time.
Thanks for reading.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
