FedEx’s shares are cheap and poised for outperformance

FedEx’s strong financial health and strategic acumen are reinforced by the upward revision of its consensus earnings. Its impressive track record of surpassing earnings expectations further bolsters this sentiment.

Meanwhile, dividend growth and active share buybacks also underscore the management’s belief in the intrinsic value of the company, while cost-saving initiatives should further enhance profitability, in short, this firm is a top pick for the long run.

It’s cheap too, as the stock trades at just 14.3 times the company’s 2024 earnings forecast.

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FEDEX CORP. (New York symbol FDX; www.fedex.com) delivers packages in the U.S. and 220 other countries.

In its fiscal 2024 third quarter, ended February 29, 2024, revenue declined 1.9%, to $21.79 billion from $22.17 billion a year earlier. That also missed the consensus forecast of $22.12 billion.

The lower revenue is partly because the U.S. Postal Service, which is FedEx’s biggest customer, is shifting more of its volumes from the company’s air freight routes to its cheaper ground delivery services (see below).

However, FedEx continues to benefit from a new restructuring plan, which includes merging its FedEx Express (air freight), FedEx Ground, FedEx Services and other smaller operating companies into a single division.

If you exclude costs related to that plan and other unusual items, FedEx’s earnings rose 11.7%, to $966 billion from $865 billion. The company spent $1 billion on share buybacks in the quarter, which is why earnings per share gained 13.2%, to $3.86 from $3.41. That topped the consensus estimate of $3.48 a share.

Growth Stocks: Losing USPS is actually a good development here for FedEx

The United States Postal Service (USPS) has named United Parcel Service Inc. (New York symbol UPS) as its primary air cargo provider when its current contract with FedEx expires on September 29, 2024.

In the past few years, USPS has shifted its letters and packages from FedEx’s planes to its lower-fee trucks, so losing this contract should improve the company’s long-term profitability.

As well, FedEx’s current cost-cutting plan should save it $1.8 billion in the fiscal year ending May 31, 2024, and a further $2.2 billion in 2025.

As a result, FedEx’s earnings per share will probably rise from $17.76 in 2024 to $21.49 in 2025. The stock trades at an attractive 14.3 times that 2025 estimate. The $5.04 dividend yields 2.0%.

The company also just added $5 billion to its current share repurchase authorization. It can now buy back up to $5.6 billion of its shares. There are no time limits for those purchases.

Recommendation in Wall Street Stock Forecaster: FedEx Corp. is a buy.

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Jim Bates

Jim is an associate editor at TSI Network. He is the lead reporter and analyst for The Successful Investor and Wall Street Stock Forecaster and a member of the Investment Planning Committee. Jim has held the Chartered Financial Analyst designation since 1992 and spent more than a decade at the Financial Post DataGroup before joining TSI Network. He has a Bachelor of Commerce degree from the University of Toronto.

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