By Jacob Sonenshine
FedEx stock has been hit hard in recent weeks, but the worst of the company’s problems are likely over. It’s time to buy.
Last year ended on a low note for FedEx, whose stock has dropped 11%, to $250, since Dec. 19. On that date, the company said its fiscal 2024 sales would fall at a low single-digit rate, down from its previous guidance for flat growth. Management blamed the miss on a decline in the number of shipments, which was partially offset by rising prices.
It wasn’t all bad, though. While sales guidance came down, management maintained its profit outlook, calling for per share earnings to come in at $17.75 at the midpoint of its range for the year. FedEx is overhauling its cost structure for calendar year 2024, and analysts expect an operating margin of 7.5%, up from this year’s 6.5%.
“[FedEx deserves] the benefit of the doubt at this point when they assure us that a [cost] plan is in place,” says Greg Branch, founder and managing partner at Veritas Financial. “This is, indeed, the sizable component of the opportunity we’d like to see them progress against from here.”
FedEx is also demonstrating that it can maintain its profitability through rough economic storms. Analysts, after all, have only reduced earnings estimates for fiscal 2024 by less than 3% and now expect the company to earn $20 a share with the help of buybacks. Higher margins should also stick over the longer-term, as long as the company is able to meet demand with reduced costs. By 2026, operating margin can rise to almost 9%. If sales can increase to $99 billion by 2026, up from an estimated $88.3 billion in 2024, earnings could rise to nearly $28.
“Volumes have yet to drive sustained confidence, but if the economic environment surprises at all, leverage in the [earnings] model should become more apparent,” writes Melius Research analyst Conor Cunningham, who upgraded the stock to Buy from Hold this past week. “The focus on cost reduction and network simplification is raising the floor on margins with significant upside if volumes recover quicker.”
That outcome would lift the stock, which trades at just 12 times expected EPS for the year, a 40% discount to the S&P 500’s roughly 19 times and one of the lowest discounts the stock has historically traded at. The market isn’t quite ready to believe management just yet, but if the company executes, its valuation should rise over time. Cunningham argues that higher margins for the long-term would help lift the stock’s multiple closer to a United Parcel Service-like 16 times, unlocking additional gains for the shares.
But let’s not get ahead of ourselves just yet. For now it should be enough that the stock has been beaten down and that results should improve. “[The] pullback in FedEx post-2Q results is overdone,” writes Cunningham, who raised his price target to $310, suggesting a 24% upside from its current level.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com