FedEx (FDX) reported their fiscal Q3 ’24 financial results after the bell last Thursday night, March 21st, and while revenue missed estimates, EPS was well ahead of consensus, as was operating income. Revenue fell 2% yoy, while operating income for FDX rose 16% yoy, and EPS rose 13%.
For fiscal Q4 ’24, which will be reported in June ’24, FDX is expected to grow revenue 1% yoy, operating income 6%, and EPS 8% yoy.
The pleasant surprise of the Q3 ’24 quarter was Express’s improved operating margin which rose 140 bp’s to 2.5%, still quite low, but better than expected.
Express has long been FedEx’s achilles heel so it’s a plus that margins improved more than expected, but there’s a lot more work ahead, from FedEx Drive and greater margin improvement.
Segment margins: Q3 ’24 actual results:
- Express operating margin: 2.5%
- Ground operating margin: 11.1%
- Freight operating margin: 16% (down a little yoy)
- Source: Morningstar
FedEx’s consolidated adjusted operating margin rose 90’s bp’s to 6.2%, but it too needs to work higher from further cost reductions and potential AI savings.
Technically, FDX’s stock traded up sharply last Thursday, although it’s still below it’s all-time-high of $319 from May ’21, or the peak in the volume explosion after the pandemic and stay-at-home mandate.
Fundamentally, the most compelling aspect to FDX’s valuation is that it’s trading at 13x the average of the next three years forward earnings, with average, expected EPS growth over the next 3 years, of 17%. ( A stock trading with a PE below it’s expected growth rate seems unusual to me. Either the Street doesn’t expect growth to be that strong, or the stock is undervalued.)
If FDX would trade up to a 17x “average” PE versus it’s 13x today, using the fiscal ’25 EPS estimate of $21.50, the stock would trade to $344.
Price to revenue is still 0.8x with average revenue growth expected the next 3 years of 3%.
My internal valuation spreadsheet values FDX at closer to $400, while Morningstar has a $236 “fair value” valuation estimate. Split the difference and you get $325.
Summary / conclusion: UPS is taking a beating today with the stock down 8% or $12.78 on 4x average volume. This blog hasn’t owned UPS for years for clients, preferring FedEx, even though UPS always had better margins.
The key to FedEx Drive (i.e. the cost rationalization and AI implementation) and they way to measure the success will be to watch the Express margin, as well as the overall consolidated operating margin at FedEx.
Over the last 20 years, when FDX’s operating margin got close to 10% or above, it usually meant the stock was near a peak. With FedEx Drive, it looks like FedEx might have a chance to narrow the difference between themselves and the UPS margin.
The key to the improvement (in my opinion) led by Drive, will be FedEx Express showing better operating margins. Express is 46% of total FedEx revenue as of Q3 ’24.
FedEx’s valuation is still reasonable, but a US economic or global economic slowdown is not a plus for a business with a high degree of operating leverage. (Here was the FDX earnings preview from last week.)
Just as I was about to hit “save” and “send” on this after-earnings summary, I looked at the FedEx spreadsheet again and saw that – of the last 7 quarters – FedEx has missed revenue estimates in 6 of those quarters. That needs to change.
Expanding margins are the goal for FDX in the next 4 – 8 quarters, but moving expected revenue growth off of the “low-single-digit” expectation range, is important too.
None of this is advice or a recommendation. Past performance is no guarantee of future results. Investing can involve loss of principal, even over short periods of time.
Thanks for reading.