FedEx Corporation (NYSE: FDX) is a multinational company that provides businesses and customers globally with a broad range of e-commerce, transportation, and business services. The company is based in Memphis, TN.
Recent Company Performance
FedEx released its fiscal Q2 2024 earnings report on December 19, 2023. It reported a revenue of $22.2 billion for the quarter, lower than last year’s 22.8 billion. EPS for the quarter was $3.99, higher than the $3.18 reported the same time the previous year. The company missed revenue and EPS estimates by 1.16% and 5.01%, respectively, in Q2 2024.
Based on the report, the revenue miss was primarily due to FedEx Express, which saw a drop in revenue, partially offset by a reduction in operation expenses. Express’ dismal performance was due to a decline in volume, reduced demand surcharges, lower fuel surcharges, and a shift toward lower-yielding services offered by the company.
The Express segment had an operating income of $178 million, with a margin of 1.7%, compared to the $352 million reported in Q2 2023, at a margin of 3.2%. Despite the 2.8% decline in revenue, the company’s EBIT increased by 17%, a sign that the cost-cutting measures were working.
Stock Performance
Following the mixed earnings report, FDX stock fell 12.05% at the close of trading on December 20, 2023. However, the stock has had a good run in 2023, rising 38.91% YTD.
FedEx Restructuring Plan
FedEx will restructure its FedEx Ground segment as part of its cost-cutting strategy. In its latest earnings report, the company said the cost-per-package fell 2% due to its cost improvement program. Analysts state the restructuring will be a multi-year program where the company downgrades most of its high-priced services. To achieve this, the company will combine its topline services and lower-end alternatives to cut costs.
The new business model will see FedEx Ground integrated with FedEx Express, which will begin handling deliveries in June 2024. It is part of a broader plan to lower costs by $4 billion by the end of 2025. Activist investor D.E. Shaw has been pushing for changes. He recently won two additional board seats.
Its rival UPS’ recent performance highlighted FedEx’s inefficient business model. Despite having a costlier unionized labor force, UPS had a revenue of $21.06 billion in its most recent earnings report.
FedEx’s new combined model is being tested in Minneapolis. Additionally, FedEx Express is currently handling Ground pickups and deliveries in Hawaii and Alaska, where air services are the main mode of package delivery. As part of the restructuring, John Smith will assume leadership of surface operations for FedEx Ground, FedEx Express, and FedEx Freight from April 16, 2024. He will also be the President and CEO of Canada and US Operations at FedEx Express.
FedEx Express Restructuring
FedEx Express, which has seen margin declines, will be divided into three colors as part of the restructuring effort. These are Purple, focused on priority deliveries; Orange, for deferred deliveries and air freight; and White, which will handle airlift in what will be the company air partner network.
Worsening macroeconomic conditions have hit FedEx Express. They include lowered global industrial production, which has reduced demand for international air freight. Additionally, shippers are opting for lower-yielding services.
For instance, USPS, a major Express customer, has diverted its domestic air packages to ground. The current contract with USPS expires on September 29, and FedEx has said there will be major changes for them to consider renewing it.
Recent restructuring efforts have raised concerns amongst its Ground contractors. FedEx CEO Subramaniam recently said the company would utilize a hybrid model of employees and contractors. The CEO added that FedEx would remain non-unionized.
FedEx Forecast
In the outlook section of the earnings report, FedEx said it was expecting a single-digital percentage decline Y/Y for FY24. That was a downgrade from the previous forecast of flat revenue growth. However, the company upped its FY24 diluted EPS forecast to $15.35-$16.85 from the prior forecast of $15.10-$16.60.
Based on its recent performance, stock analysts have given FDX stock a buy rating. They predict a high of $330 and a low of $205 for the stock. The analysts’ average prediction for FDX is $285.04, a 15.73% upside based on the last price of $246.49.
Should You Buy FDX Stock
FedEx is committed to a long-term restructuring plan via which it will cut costs and improve the efficiency of its operations. In the long term, these efforts will pay off. It is also worth noting that in the past ten years, FedEx has increased dividend payouts by an average of 24.8% per year.
As such, FDX stock might be worth considering for dividend investors. While the stock might face challenges in the first half of 2024, its long-term performance looks promising. Consequently, the buy rating by analysts is accurate.
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