Last Friday morning, December 20, 2024, FedEx (FDX) was trading up $22 near $299 per share, after reporting their fiscal Q2 ’25 financial results the night before, and noting that the Freight business was being evaluated for a spinoff (which was expected by the sell-side analysts).
The surprising aspect to the report was that FedEx lowered forward guidance (again) for the core business (i.e. Express and Ground).
The point is FedEx opened for trading that Friday morning, near $297 per share, promptly started to selloff sharply, trading down near $270 per share, going from a $22 pre-market gain to a $5 loss, finally settling at a close of $275 on the day, roughly unchanged from the Thursday night’s December 19th close also at $275 per share.
This blog managed to squeeze a $280 sale price for the vast majority of client accounts, and after the bounce from the morning sell-off, and I was happy with that price.
FedEx’s Q2 ’25 financial results:
- FDX grew revenue -1% in Q2 ’25, operating income fell 3% y-o-y and EPS grew 1%:
- While the core FedEx margin of 6.8% looked to be about 8o bp’s better-than-expected, Freight missed, while Express beat;
- With the cost reduction initiative almost complete, FedEx is still dealing with an operating margin that is well below 10%;
- It looks like the $19 – $20 EPs guidance for fiscal ’25 was reduced by a $1, or roughly 5%;
The bigger picture:
As someone who was always a big fan of Fred Smith and the FedEx brand, the Wall Street Journal on December 2nd, that talked about the “no frills service that is delivering more and more packages” (i.e. Shein,) (WSJ subscription may be required) got the antenna up, after the FedEx initiative over the last 12 months to reduce costs, improve margins and restructure the FedEx business, still left the stock underperforming the SP 500.
Over the 21 months from March 31 ’23 through December 20 ’24, when FedEx Corp first announced their renewed focused on re-engineering the business, FedEx (FDX) stock returned +13.84% versus the Sp 500’s +25.58% (annualized).
To be fair, if the SP 500 corrects 15% in calendar 2025 (and that’s not a forecast or an estimate), the fact is FedEx stock will likely perform pretty well in a tougher equity market, than the tech and growth dominated stock market of the last few years.
In the end though, watching the price action of FDX on Friday morning, December 20 ’24, my first thought around FedEx’s core business was that it continues to perform very sluggishly, with 7 of the last 9 quarters seeing negative y-o-y revenue growth. The other thought that struck me was there are other publicly traded logistics companies whose shares could be bought outright today, while not holding FDX waiting for the spinoff of Freight.
Valuation:
A number of sell-side analysts still have a $300 or better valuation on FDX, mainly due to the Fright spinoff, while Morningstar sports a $261 fair value estimate on the stock.
The stock is still fairly cheap trading at 12x expected EPS for an average growth rate over the next 3 years of 12%. In addition FedEx’s price-to-sales is still 0.75x on a trailing 12-month basis. (To be frank with readers, I’ve used the valuation case many times over the last few years to stay long the stock, and it’s still the case.)
The $280 sale opportunity after a very poor trading day, just seemed like an opportunity too good to pass up.
Summary / conclusion:
On the plus side FedEx will face easier compares the next few quarters, even as the USPS business continues to be a drag. The conference call notes did say that the end of the USPS business is still impacting FedEx’s financial results.
Before the USPS was concluded a few quarters back, management was giving indications that everything was on track at USPS and then it seemed like the bottom fell out, and the USPS business was curtailed, and FedEx took a financial hit on the termination.
It definitely felt like FedEx “over-promised” and under-delivered on that key segment of the business, and that contract.
In terms of what opportunities look better today, with the FedEx proceeds, certain segments of industrials, maybe some of out of favor defense names, or even “old tech” names like Cisco and IBM, might be added to with the FedEx sales proceeds.
It’s always difficult letting a good brand good, particularly a stock like FDX that’s been owned for years. However, opinions can reverse too, based on new data. However I think there may be better return opportunities in the industrial space than FDX over the next 12 months, not to mention a different stock market in general (possibly), so the thinking was sell FDX and redeploy the proceeds elsewhere.
None of this is advice or a recommendation, but only an opinion. Past performance is no guarantee of future results. Any information provided above may or may not be updated, and if updated may not be done so on a timely basis. The performance chart is from Ychart. Investing can and does involve the loss of principal even for short periods of time.
Thanks for reading.