FedEx Corporation (NYSE:FDX) is scheduled to report its fiscal Q2 ’24 financial results after the close on Tuesday, December 19th, 2023.
The sell-side revenue, operating income, and EPS consensus is expecting the freight giant to report $4.20 in earnings per share (EPS) on $22.4 billion in revenue for expected year-over-year (yoy) growth of -2% and 32%. Operating income, which is expected to come in at $1.47 billion, is expected to grow 22% yoy.
Looking at historical revenue, FedEx’s yoy revenue growth will lap the following quarters from 11/22:
- 8/23: -7% actual yoy revenue growth
- 5/23: -10% actual yoy revenue growth
- 2/23: -6% actual yoy revenue growth
- 11/22: -3% actual yoy revenue growth
One year ago, in the November ’22 quarter, (which because of FDX’s May fiscal year-end is the fiscal Q2, ’23 quarter) FedEx saw revenue fall 3%, operating income fall 28% and EPS fall 34%. That’s an easy comp for Tuesday night, December 19th, but that’s hardly the whole story.
Full-year fiscal ’24 revenue and EPS are expected to decline 1% and grow 22% respectively (again, FDX’s fiscal year end is May 31 each year), and then see revenue grow 4% – 5% and EPS 22% in fiscal ’25 and ’26 based on current consensus. The FedEx re-organization, announced in April ’23, was supposed to drive operating margin expansion of over 10%.
Last quarter, Ground margin improved by 480 bp’s yoy, and given the drop in crude oil, we might see further expansion of segment margins. The flip side of that coin is whether the US economy is slowing too fast in calendar Q4 ’23, and whether that is impacting volumes right now.
Throughout the 1990s and 2000s, anytime FDX’s operating margin hit 10% it usually meant a peak for the stock price, but with the new CEO Raj Subramanium consolidating the three FedEx operating segments (i.e. Express, Ground, and Freight) into one segment, the company might be entering a new world where a 10% operating margin becomes the standard.
This is something the founder and long-time CEO Fred Smith was not a supporter of (and that’s a guess on my part) since it likely means FedEx Express will see the bulk of the cost reductions). The point is that FDX is an operating margin story going forward, for the next few years, and it will take time to play out.
Valuation
FedEx the stock looks particularly compelling on two valuation metrics, the PEG (PE-to-growth) and price-to-sales, the latter of which might be more important than the PEG. FDX is expected to growth EPS in fiscal ’24, ’25 and ’26, by 22%, 22%, and 11% respectively. Trading at $280 per share, the PE on the stock is just 13x those average forward earnings growth numbers.
The price-to-sales metric is currently 0.79x, which historically, has meant the stock is still buy. Also, historically, when the stock rises close to 1.0 price-to-sales or over, then investors are usually better served to trim it’s weight or sell the shares.
That being said, the “new FDX” (meaning the margin emphasis) might change some of these historical valuation measures.
This blog’s internal valuation spreadsheet – as of last quarter – had a $318 intrinsic value assigned to the stock, while Morningstar’s fair value rating currently and as of last quarter, was $231 per share.
Conclusion
FedEx saw its business significantly disrupted by Covid in 2020, albeit positively influenced, as Ground volumes soared, and the freight giant scrambled to get enough drivers and delivery people to get the packages out, and then volume rapidly returned to a more normal state after late 2020 and into 2021, and now FedEx has had to take action to normalize the cost structure and re-align the cost base.
I do think “One FedEx” is a big step forward since FedEx Express, which is FedEx’s largest segment by revenue and operating income responsible for 45% – 55% of total FedEx revenue and 4% of operating income (historically) has a bigger fixed-cost footprint and has typically been a drag on returns.
FedEx Ground hit 5% of revenue in the August ’23 quarter, the first time I’ve seen Ground operating income hit 5% of revenue and my spreadsheet goes back to the late 1990’s. (FedEx Ground didn’t start until the year 2000, so Express has been around far longer, but with e-commerce growth, it looks like the primary operating segment for FedEx going forward. )
The drop in the price of crude oil in the November ’23 quarter if only for a month or two might have helped FedEx’s margin, if the fuel surcharge was in effect during any part of this fiscal Q2 ’24 quarter. FedEx is your consummate “old America” stock. It has a large, fixed-cost global network, which results in smaller changes in revenue, leading to much larger changes in operating income and EPS.
Having modeled the stock every quarter since the late 1990s, I looked at FDX’s “average” revenue growth for the last 40 quarters or the last 10 years (on a trailing-twelve-month basis) and FDX’s average revenue growth for those 40 quarters was 8%, and that includes pre-Covid and post-Covid periods. With YoY revenue growth for this fiscal Q2 ’24 revenue expected to still be negative, as well as the next few quarters, FedEx still has some upside to get back to “average” on revenue, which means operating income and EPS can still leverage higher.
I have no idea what the stock will do after earnings. It could be up or down $20 per share. If the stock sells off after earnings, this blog would be a buyer, since clients have a 2% position in FDX coming into the earnings report. I do worry about all the bullish sentiment coming into the quarter: the stock has been upgraded by a few sell-side firms before this earnings report.
If Raj and the new FedEx management team can permanently push that operating margin target over 10% – where 10% becomes the baseline, the stock could go much higher, BUT, that’s a demanding task with a fixed-cost base of FedEx’s. The all-time-high on the stock was $319 per share in June ’21, just before the fiscal Q4 ’21 earnings release.
Clients have been long FedEx and never owned UPS mostly due to Fred Smith, who just relinquished the CEO and Chairman positions and is now Executive Chairman of the FedEx Board. Have to love (and invest) in a guy who was a Vietnam chopper pilot and then took a C on his Yale business plan paper to start an overnight, letter-delivery business in America in the 1970’s. (One client is still long a position in the stock with a $32 cost basis, that was bought on March 12, 2000.)
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None of this is advice or a recommendation. Past performance is no guarantee of future results. All EPS and revenue data is sourced from IBES data by Refinitiv. Many factors can influence a stock price and market valuation, some known, most not known.