FedEx
reported weaker-than-expected quarterly earnings and the stock was falling sharply in premarket trading Wednesday.
The news wasn’t all bad though. Full-year financial guidance was maintained as the company managed to control costs effectively. The economy isn’t helping though. Sales are still falling.
For the fiscal second quarter ended Nov. 30, FedEx reported earnings per share of $3.99 from sales of $22.2 billion. Wall Street expected per-share earnings of $4.19 on sales of $22.4 billion, according to a FactSet survey. A year ago, FedEx reported earnings per share of $3.18 on sales of $22.8 billion.
Operating profit margins came in at 6.4%, up more than 1 percentage point year over year despite sales dropping by 3%. It’s the second consecutive quarter of year-over-year profit margin improvement despite lower sales.
The margin improvement is “clear evidence of the progress we are making on our transformation as we navigate an uncertain demand environment,” said CEO Raj Subramaniam in a news release. “We are moving with speed to make our network more efficient while delivering outstanding service to our customers through the peak season with the fastest Ground network in the industry.”
The results looked OK. Still, shares were down 9.6% early Wednesday.
Expectations before quarterly results were running high. Coming into Tuesday trading, FedEx stock had risen about 13% over the past three months while the S&P 500 and
Dow Jones Industrial Average
rose 6% and 8%, respectively. Through Tuesday trading, FedEx stock has gained about 62% this year.
Looking ahead, FedEx management still expects to earn between $17 and $18.50 a share in fiscal year 2024. That’s the same guidance provided in September.
Guidance was maintained despite weaker-than-expected sales. Subramaniam had said that hitting the midpoint of guidance would likely require year-over-year sales growth of about 2%. Sales have fallen almost 5% in the first half of the company’s fiscal year. Now it looks as if the company will hit the midpoint of guidance even if there is no or negative sales growth. That’s another example of cost controls taking hold.
Wall Street is likely to accept the results. Beat-and-raise quarters can help any stock, but that isn’t all that investors should focus on, according to Bernstein analyst David Vernon. “The investment case on FedEx is less about the quarter and more about the multiyear transformation of the company through DRIVE and Network 2.0,” wrote Vernon in a recent report previewing earnings.
DRIVE and Network 2.0 are names for FedEx’s cost and productivity improvement initiatives.
Simplification is a goal of both. FedEx “will collapse the overhead structure for Ground and Express [division] starting in June,” added Vernon. “As the earnings lift from those activities starts to be realized we think market confidence in an outsize earnings growth outlook…will manifest itself in a higher multiple.”
FedEx stock trades for about 14 times calendar 2024 earnings. Competitor
United Parcel Service
shares trade for about 17 times, and the
S&P 500
trades for about 19 times.
Vernon rates FedEx stock at Buy with a $340 price target.
Write to Al Root at [email protected]
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