Last Thursday night, September 19, ’24, FedEx (NYSE:FDX) reported their fiscal Q1 ’25 earnings release and needless to say they missed on just about every major metric lowered guidance as well.
Here’s how results compared to estimates pre-release:
- FedEx revenue: $21.58 billion versus the $21.97 bl estimate, missed by 2%;
- FDX operating income: $1.2 billion actual vs $1.67 bl estimate missing by 28%;
- FDX EPS $4.82 estimate versus $3.50 EPS actual missing by 25%;
Express Margin, which is now Express and Ground consolidated, fell to 5.4%, versus the 7.3% estimate.
Revenue growth, which has been the issue the last 6 quarters was flat y-o-y, and that has to improve.
In this blog’s FedEx earnings preview, the title was ” Ultimately, FedEx is a margin and free-cash-flow story” and unfortunately neither metric performed well.
That being said, there are a couple positives to keep me holding the stock for client accounts, at least through calendar year-end ’24:
1.) FedEx had a tough comparison with fiscal Q1 ’24 or the year-ago quarter. That quarter’s operating margin was 7.2%, the highest quarterly operating margin prior to the 8.3% operating margin from Q4 ’24 (or the quarter ended May ’24);
2.) The first fiscal quarter every year (August end) is usually the weakest quarter of the year for FedEx;
3.) Of the 4$ billion expense savings targeted in April – May ’23 to reduce operating costs, there is still $2.2 billion left unutilized. My own opinion in several of the articles written on FedEx in the last 2 – 3 years, was that the freight giant might have to take out more than $4 billion or 5% of the company’s total annual expense run rate, particularly if AI savings hits. However, that remains to be seen. It does seem like FedEx is moving slowly on removing expenses from the P/L. (It’s easy to talk numbers and say “be aggressive” for shareholders, but we’re talking people’s jobs and livelihoods at FedEx.)
A big negative was that the pre-earnings release, the Street was looking for 3% revenue growth for FedEx in fiscal ’25, but post the call, that number has been cut to 1%. It’s now been 8 consecutive quarters since FedEx has seen material revenue growth. That last quarter – August ’22 – saw 6% revenue growth for FedEx, and we haven’t gotten close since.
Looking at cash flow and free cash flow, the TTM (i.e. trailing 12-month) numbers have rolled over, but free cash flow still shows a 4% free cash yield at current prices.
Conclusion:
Capital-intensive companies tend to feel economic slowdowns first, so the first question every analyst is asking post the FedEx results is, “Were the results economic or operationally driven?” and it could be a combination of both, but when you listen to the FedEx conference call and read the conference call notes, the company says they have a good handle on volume changes as they occur and thus are able to react to changes in either customer demand or the economy.
Frankly, it didn’t seem like that was the case in fiscal Q1 ’25.
The stock has bounced nicely after last Friday’s 13% decline on very heavy volume, and while a few positions were sold in taxable accounts to take a tax loss for clients, the majority of the positions were kept since the majority of positions remain at a capital gain.
The next earnings report, which will be fiscal Q2 ’25, is sometime later in December ’24.
FedEx has a little easier operating margin compared to fiscal Q2 ’24 and fiscal Q3 ’24 when the operating margin was 6.2% – 6.3% a year ago. That’s an easier hurdle for FedEx but the challenge now is a slowing economy and potentially slowing volumes in Express and Ground.
The economy will complicate matters as cost consolidation continues.
The stock is still trading at an 11x “average” multiple using EPS estimates updated after Thursday’s results, which reflect an expected, average 13% growth rate the next three years. That growth rate could still come down from here.
None of this is advice or a recommendation, but only an opinion. Individual positions can change at any time and the positions may not be necessarily updated for readers. Past performance is no guarantee for future results. Investing can and does involve the loss of principal, even for short periods of time. Readers should gauge their own comfort with portfolio volatility and adjust accordingly.
Thanks for reading.