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FedEx rallies into earnings, can the delivery giant turn around its recent underperformance?

AInvestThursday, Mar 21, 2024 3:34 pm ET
2min read

FedEx (FDX), the renowned package delivery giant, is set to report its Q3 (Feb) earnings results today after the close. The company has faced challenges in recent quarters, with declining revenue and lower-than-expected demand. However, despite the short-term headwinds, FedEx's long-term growth potential remains intact.

Shares of FDX broke above the 200-sma on March 12. It would retest this level on March 18. It would hold its ground and has rallied 5% heading into this report as investors look for signs of a recovery in its business. A solid report would give it the opportunity to fill the gap down from its last earnbings report, December 22, when the stock was trading at $285.

Last quarter, FedEx reported its first EPS miss in several quarters. Revenue in Q2 (Nov) fell 2.8 % year/year to $22.16 bln, which fell short of expectations. The company also lowered its FY24 revenue outlook to a low single-digit decline, compared to its prior forecast of approximately flat. 

FDX had reported four consecutive solid EPS beats, with three of the four being quite large. However, revenue has been light for the past seven quarters.

Market conditions in the US remained soft, with Q2 demand lower than FDX had anticipated. The industry has now experienced 10 consecutive quarters of decline in US domestic average daily volume. International market pressure continued to affect the company's performance, even as its Europe and EMEA teams were able to grow parcel volume.

Express, its largest segment, continued to struggle with revenue falling 6% year/year to $10.25 bln. This was driven by market contraction and lower fuel and demand surcharges. Global freight pounds were down 18% year/year, driven by lower Postal Service volume and a decline in industrial production. Despite these headwinds, FedEx noted that its networks are running extremely well. 

The Ground segment, on the other hand, saw revenue grow 3% year/year to $8.84 bln, driven by higher yield and volume. 

FedEx expects revenue to continue to be pressured by volatile macro conditions negatively affecting customer demand in the remainder of FY24. At FedEx Express, the company expects a continued shift in service mix to negatively affect revenue and operating income in FY24. 

FedEx acknowledged that its variable costs could not be adjusted immediately for a softening demand backdrop in FQ2, but it has recalibrated these costs entering FQ3, which should benefit margin as it relates to normal seasonal trends. However, FDX also noted several weather events that particularly impacted the Memphis hub, potentially affecting the quarter's performance. 

Evercore ISI lowered its Express margin to 0.8% (from 1.2%) in light of these sequential changes, bringing its FQ324 EPS estimate to $3.39 (from $3.51). Interestingly, Evercore"s proprietary correlation work shows that its Ground revenue estimate may be too conservative, while LTL pricing/margin reports from late January and early February could suggest upside at FDX Freight

Hedgeye, an independent research firm, added FedEx as a new long idea with potential upside of over 40% in the next one to two years. Hedgeye analyst Jay Van Sciver expects FDX to benefit from improving industry trends, recording a record in some of the higher margin incremental revenue from international priority. 

In conclusion, while FedEx has faced several headwinds in recent quarters, the company's resilient network and focus on recalibrating variable costs provide reason for optimism. With a 2% dividend yield and the potential for an increase, as well as record-high international priority revenue, FedEx presents an interesting investment opportunity for long-term investors. As the company reports its Q3 earnings, it will be essential to assess its performance in light of the market conditions and its own internal adjustments.


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