FedEx (NYSE:FDX) reported fourth quarter earnings on the 25th of June, beating analyst expectations on the top and bottom line. In December 2023, I assigned a buy rating to FedEx stock, and while that rating has not resulted in market outperforming returns, the performance figures are slightly disfigured. In this report, I will be discussing the following:
- FedEx stock price development.
- Q4 2024 earnings
- The financial guidance for FY2025
- My price target and rating for FedEx stock.
How Has FedEx Stock Price Developed?
Interesting to note is that as I was writing this report, the stock price reached my earlier price target of $293 and is now showing market outperformance. The stock price has increased 18.1% compared to a 14.9% return for the broader markets.
I have edited this section prior to submission to include comment on the significant increase in the share prices, but also want to keep in my previous note that reflects the FedEx stock price before the significant increase:
Since I issued a buy rating for FedEx stock, stock prices have seen modest gains of only 3.37% compared to 15% for the S&P 500. That's obviously not the kind of performance we are looking for in names for which we assign a buy rating. The reason why the stock has not performed extremely well is because the stock price tanked after posting its third quarter results. Before that time, 95% of the upside I expected materialized. So, the stock price was just 5% off my price target before it fell back. FedeEx stock tends to fall rather sharply when there are concerns about the performance and market conditions and that is the driving reason why the performance has been rather poor although the stock came very close to reaching my price target.
FedEx Beats Analyst Estimates On Top And Bottom Line
For the fourth quarter, FedEx posted revenues of $22.1 billion, beating analyst estimates by $40 million. Looking at the relative size of the beat, I would view it more as revenues coming in line with estimates and just marginally better than that. Earnings per share came in at $5.41, beating estimates by $0.04. This beat was relatively small. As a result, I don’t view the fourth quarter earnings as a true driver of the stock price.
The fourth quarter and full year results, however, showed something to be very happy with and that's the fact that on slightly higher revenues for Q4 and lower revenues for FY24 the company saw stronger growth in its adjusted operating income. This can be seen as a validation that its DRIVE execution is well on track. The DRIVE program aims to permanently reduce costs by $4 billion by FY2025. Driven by this cost reduction initiative, the company has been able to increase profits in a very challenging market for freight and logistics. So far, the company has realized $1.8 billion in savings consisting of $500 million in savings in the Air Network & International segment, $750 million in savings on the Surface Network and another $550 million in G&A savings. So, the company is half way through and the easy conclusion is that there are more cost savings ahead, which provides a strong prospect.
FedEx Express revenues remained stable despite package yield being up and positive year-on-year growth in international package volumes while domestic package volumes were down. Revenues remained stable as positive package yield and positive international volumes were offset by lower domestic package volumes, lower international demand surcharge and higher deferred services in the revenue mix. The deferred services are the cost-efficient delivery solutions for businesses and those come at a lower price. So, when there's more of those services in the mix that will obviously have some adverse impact on revenues.
FedEx Ground revenues were up 2%, which was driven by a combination of volume growth and favorable yield ad FedEx Freight saw 2% higher revenues, driven by slightly higher volumes but mostly by higher yield. Year-on-year, yields have been slightly up for Domestic, Ground and Freight while they're down for international packages driven by the lower surcharges as more international capacity has significantly increased as more commercial airplanes have returned to service and utilization and thus capacity are improving.
Looking at the segment operating income, it does not quite come as a surprise that FedEx Express results declined 18%. That's driven by the aforementioned challenges on the international network, partially offset by cost reduction initiatives. The Express segment also saw carrier costs for the launch of the Tricolor initiative. The Tricolor initiative is part of the DRIVE initiative in an effort to optimize asst utilization. The purple network aims to move high-priority and high volumes through the FedEx-owned fleet and network, the orange network is more of a point-to-point network to decongest the FedEx hubs and connect with ground surface networks while the white network serves as an adaptive capacity layer serviced by FedEx partners.
The company had a $157 million asset impairment charge related to the removal of 22 Boeing 757 freighters and seven engines from the US domestic network. That charge is adjusted for in the Non-GAAP reporting, but it's important to keep in mind that FedEx is bringing capacity in line with demand and modernizing its fleet. While results decline, the margins improved from 2.8% to 4.1%.
FedEx Ground saw a 13% or $133 million increase to the segment results driven by higher yield, lower insurance costs and volume growth, while the DRIVE initiative is paying dividends, resulting in a 130 bps margin increase to 13.4%. FedEx Freight results saw a 13% increase in profits as well, driven by yield and cost management. On the ground surface network, we're also seeing a shift towards rail transport to maximize efficiency.
FedEx Guides For A Bullish Year
For FY25, FedEx has provided a very strong outlook, which has set the stock price significantly higher post-earnings. There's a positive inflection point on domestic and international demand trends that will result in low-to-mid single-digit revenue growth, while capex will be stable year-on-year and reflect a smaller percentage of sales. For the full year, a $1 billion increase in operating income is expected and that's despite facing several headwinds.
The added revenue is expected to only generate $0.1 billion in added profits. That's not enough to offset $1.3 billion in headwinds. In September, the FedEx contract with the U.S. Postal Service will be terminated, which will generate a $0.5 billion headwind. The company has not quite laid out how that will be mitigated, but we're already seeing capacity adjustments and I believe that the contract expiration will allow the company to further continue right-sizing the fleet and improve operational efficiency. Another headwind is $0.4 billion as international export yield remains pressured, and then there's another $0.3 billion due to fewer operating days and $0.1 billion due to variable compensation. The offsetting factor is not the top-line growth that is expected, but the additional $2.2 billion in DRIVE savings that has to be realized. A big driver of the savings seems to be operational efficiency improvements in Europe, where there's a $600 million savings opportunity. From the earnings call we could not quite get a grasp of how much cost reduction has already materialized, but it's likely in the early stages given that the company sees a lot of potential for optimizing in Europe.
So, the guidance is really strong and that's primarily due to the DRIVE initiative that FedEx initiated that will more than offset $1.3 billion in headwinds in the same way it offset operational challenges in FY24.
FedEx Stock Remains A Buy
I have added the most recent results, projections and balance sheet data to the evoX Stock Screener, and I'm maintaining my buy rating. The price target for FY25 would be around $310, representing around 5% upside. However, based on solid execution of DRIVE and the fact the company is already operating in FY25 at the time of writing, one could also adopt the FY26 price target of $353, representing 20% upside. Interesting to note is that while the results were quite strong for FY24, the multi-year EBITDA generation is now modeled to be roughly 3% lower as international demand surcharges are expected to continue dropping. The free cash flow generation is expected to be stable compared to my earlier projections and that's driven by continued challenges on the international markets, the costs absorbed for the network transformation before offset by lower capex. We have also increased our assumptions for net share repurchases which are expected to be $500 million higher than previously modeled, while the company is likely to be able to continue increasing dividends.
Wall Street analysts have an average price target of $308.15 for FedEx, which matches the FY25 that rolls out of my stock screener, and I believe that given the strong guidance and the strong execution on DRIVE, we will see that price target increase and move closer toward the FY26 target I calculated.
Conclusion: FedEx Executes A DRIVE For Growth
The FY2024 and Q4 results provide strong evidence that the cost reduction efforts targeted by FedEx are paying off. In fact, the savings are outweighing the headwinds and that's definitely a good sign. The company also has good visibility with further cost reductions in FY25 with big cost reductions to be realized in Europe. FY25 will once again be a year with various headwinds, but the DRIVE initiative will also once again absorb the headwinds. We're seeing some positive developments on yields and volume, but the reality is that international yield will continue to be present, which will likely result in further reductions of surcharges. Incorporating all the various head and tailwinds and connecting those to the valuation for FedEx, I believe that FDX stock remains a buy.
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