Federal Express Stock Drops 5% on Lower Than Expected Earnings Guidance

Federal Express, a prominent logistics company, recently released its first-quarter earnings guidance, which fell short of market expectations. The company reported an adjusted earnings per share (EPS) guidance of $3.40 to $4.00 for the first quarter, significantly lower than the market consensus of $4.05. This disappointing outlook led to a more than 5% drop in the company's stock price after hours. Notably, Federal Express did not provide a full-year EPS guidance for the fiscal year 2026, adding to investor concerns about the company's future performance.

Despite exceeding expectations in the fourth quarter, the management's cautious stance on future prospects has raised eyebrows among analysts and investors alike. The lack of a full-year guidance suggests that the company is facing uncertainties that it is not yet ready to disclose, further contributing to the market's negative reaction. The company's fourth-quarter results showed a revenue of $22.2 billion and an adjusted EPS of $6.07, both exceeding analyst estimates of $21.8 billion and $5.87, respectively. This performance was largely attributed to the company's aggressive cost-cutting measures under the DRIVE plan, which successfully reduced structural costs by $2.2 billion for the fiscal year 2025.

However, the market's focus quickly shifted to the company's forward guidance. The EPS guidance for the first quarter of the fiscal year 2026 was set at $3.40 to $4.00, with an average of $3.70, which was below the market consensus of $4.05. More importantly, the company did not provide a full-year EPS guidance for the fiscal year 2026, a departure from its previous practice. This omission raised concerns about the company's confidence in its future earnings and its ability to navigate the current economic environment, which is characterized by slowing growth and heightened trade tensions.

The company's cost-cutting efforts, while impressive, may not be enough to sustain profitability in the face of declining revenue growth. Federal Express has been implementing the DRIVE plan since the fiscal year 2023, which has resulted in a cumulative reduction of $4 billion in structural costs. The company aims to further reduce costs by $1 billion in the fiscal year 2026. Additionally, the company has been controlling capital expenditures, with a 22% year-over-year decrease in the fiscal year 2025, bringing the capital expenditure ratio to a historic low of 4.6% of revenue. The company also returned $4.3 billion to shareholders through share repurchases and dividends, with $3 billion of the repurchases exceeding the original plan of $2.5 billion. The company has committed to continuing strong share repurchases and increasing dividends by 5% in the fiscal year 2026.

While these measures may support profitability and shareholder returns in the short term, the company's long-term growth prospects remain uncertain. The company's core narrative has shifted from growth to discipline, as it faces challenges such as slowing e-commerce growth, weak business transportation demand, and escalating international trade frictions. The company's valuation, while reasonable at 11 times expected earnings, reflects these underlying challenges. Investors will need to weigh the company's reasonable valuation against its dimming growth prospects. Key areas of focus for the future include the impact of economic recession risks on B2B logistics demand, changes in tariff policies on international business, the integration effects of Network 2.0, the execution of the Freight division spin-off, and the management's ability to maintain strategic continuity following the departure of the founder.