Key Points
FedEx results show cost savings and improved profitability.
Guidance supports capital return outlook.
Share repurchases and dividends will be worth about 4% to investors in FY2024.
5 stocks preferred over FedEx
Shares of FedEx (NYSE: FDX) are up more than 5% following its Q1 report for fiscal year (FY) 2024 and may continue to rise. While the results are mixed, the guidance is as expected, and what’s important now is the margin and cash flow. The company has increased its margin through cost reductions that are expected to continue, leading to a positive outlook for capital returns. In Q1 FY2024, FedEx conducted $500 million worth of accelerated share repurchases, with another $1.5 billion expected by the end of the fiscal year. These repurchases, totaling $2 billion, are worth more than 3% of the company’s pre-release market cap, and the likelihood of future repurchases in FY2025 and beyond is high.
FedEx’s Mixed Results Provide What Investors Want
While FedEx’s Q1 results were mixed, they delivered what investors were looking for: margin improvement, a positive outlook for sustained margin strength, and strong earnings. Despite a 6.5% year-over-year decline in revenue to $21.78 billion, which missed the consensus estimate by 60 basis points, the company demonstrated significant bottom-line strength. On a segment basis, margins improved in two of the three operating segments, but declined in the third. Systemwide volume metrics revealed a total volume decline of 2.2%, driven by a 6.7% decline in the US, largely attributed to weaker pricing.
The market’s excitement lies in the operating margin, which expanded on a GAAP and adjusted basis. The adjusted margin increased by 200 basis points compared to the previous year, thanks to $1.8 billion in permanent cost savings. The takeaway is that the adjusted earnings per share (EPS) of $4.55 exceeded expectations by 2000 basis points and improved by 3000 basis points compared to the previous year.
Guidance is equally mixed, but indicates a steady business outlook and enough cash flow to sustain dividends, share repurchases, and capital expenditures (CAPEX). The company has narrowed its previous guidance to a range that aligns with consensus estimates. Assuming business picks up, FedEx is positioned for significant earnings leverage.
Analysts Support FedEx’s Capital Spending Plans
One of the highlights of FedEx’s Q1 report is its capital returns. The stock currently yields about 2% in dividends and repurchases shares. Share repurchases are expected to reach or exceed $2 billion without materially impacting operations or the balance sheet. The company generated over $1 billion of net income in Q1 and has over $7 billion in cash, providing sufficient resources to repurchase the remaining $1.5 billion in shares and cover CAPEX plans for the rest of the year. The $5.7 billion in CAPEX will be focused on modernization efforts, including the adoption of electric vehicles (EVs) for the fleet, batteries, hydrogen fuel cells, charging and refueling networks, robots, automation, and artificial intelligence (AI). If other major corporations follow a similar path, the tech sector should see solid growth in 2024.
Analysts maintain a Moderate Buy rating on the stock, and the consensus price target has increased. Following the release, three fresh revisions with higher price targets have been observed. The stock is expected to trade near $300, compared to the consensus target of $256, which assumes the stock is fairly valued given recent price action.
Technical Outlook: FedEx Trending Higher
FedEx shares are trending higher and may reach a new high. The 5% post-release increase confirms support above the 150-day EMA (Exponential Moving Average). However, there is still some risk involved. If the market does not follow through on this signal and begins to sell off, a top could form in the price action. In that scenario, FDX shares may consolidate or pull back to strong support levels. On the other hand, if the market does follow through, FDX could set a new high with a potential move to $300.
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