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FedEx (NYSE: FDX) announced its financial results for the third quarter of 2024 after the market closed last Thursday evening (March 21). Although revenue did not meet expectations, earnings per share (EPS) and operating income were both well above consensus.Revenue down 2% year over year, while FDX operating income rises Annual growth was 16%, and earnings per share grew 13%.
For the fourth fiscal quarter of 2024, which will be announced in June 2024, FDX expects revenue to increase by 1% annually, operating income to increase by 6% annually, and earnings per share to increase by 8% compared with the same period last year.
The surprise in 3Q24 was that Express’ operating margin improved, rising 140 basis points to 2.5%, which is still low but better than expected.
Express has long been FedEx’s Achilles’ heel, so better-than-expected margin improvement is a plus, but there’s still a lot of work to do on FedEx Drive and greater margin improvement.
Segment Margin: Q3’24 Actual Results:
- Express operating profit rate: 2.5%
- Ground operating profit rate: 11.1%
- Freight transportation industry profit margin: 16% (slightly lower year-on-year)
Source: Morningstar
FedEx’s consolidated adjusted operating margin rose 90 basis points to 6.2%, but it also needs to improve efficiency through further cost reductions and potential artificial intelligence savings.
Technically speaking, FDX stock rose sharply last Thursday, although it remains below its all-time high of $319 from May ’21, or the peak of the explosion in trading volume following the pandemic and stay-at-home orders.
Fundamentally, the most compelling thing about FDX’s valuation is that it trades at 13 times the average of expected earnings over the next three years, which is an average of 17% expected earnings per share growth over the next three years.
(To me, it seems unusual for a stock to trade at a price-to-earnings ratio lower than expected growth. Either Wall Street isn’t expecting growth to be that strong, or the stock is undervalued.)
If FDX trades at an “average” P/E of 17x (compared to 13x currently), the stock would trade at $344 using an FY25 EPS estimate of $21.50.
The P/E ratio is still 0.8 times, and the average revenue growth rate is expected to be 3% in the next three years.
My internal valuation spreadsheet values FDX at nearly $400, compared with Morningstar’s “fair value” estimate of $236. Split the difference and you’ll get $325.
Summary/Conclusion: UPS (UPS) was hit hard today, with shares down 8%, or $12.78, on 4x average volume. This blog has not offered UPS to its customers for years, preferring FedEx even though UPS’s profit margins have always been higher.
The key to FedEx Drive (i.e. cost rationalization and AI implementation) and the way to measure success will be to look at Express margins as well as FedEx’s overall consolidated operating margins.
Over the past 20 years, when FDX’s operating margins approached 10% or above, it usually meant the stock was near its peak. With FedEx Drive, FedEx seems to have an opportunity to close the profit gap between itself and UPS.
The key to improvement from Drive (in my opinion) will be FedEx showing better operating profits. As of the third quarter of 2024, the express delivery business accounted for 46% of FedEx’s total revenue.
FedEx’s valuation remains reasonable, but a slowdown in the U.S. or global economy is not a boon for a business with high operating leverage. (Here’s last week’s FDX earnings preview.)
Just as I was about to click “save” and “send” on this earnings summary, I looked at FedEx’s spreadsheet again and discovered that FedEx’s revenue has missed expectations in six of the past seven quarters. This needs to change.
Margin expansion is FDX’s goal over the next 4-8 quarters, but it’s also important to get expected revenue growth out of the “low single-digit” range.
None of this is advice or recommendations. Past performance is no guarantee of future results. Investing may result in a loss of principal, even in the short term.
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Editor’s note: Summary highlights for this article were selected by Seeking Alpha editors.
