FedEx shares fall 3% after delivery giant offers investors only gloom over earnings

Shares in air freight and delivery giant FedEx (FDX:NYSE) dropped 3% in after hours trading after giving a disappointing outlook despite beating fourth quarter earnings estimates.

The cautious outlook calls for ‘flattish’ revenue and full year adjusted earnings per share toward the bottom end of the $16.50 to $18.50 range.

This fell short of analyst expectations which are pegged at $18.4 according to Refinitiv data, implying future downward earnings revisions.

The cautious guidance weighed on European and UK peers with DHL-owner Deutsche Post (DPW:XETRA) shares falling 2% to €43.07 and Royal Mail parent International Distribution Services (IDS) shedding 1% to 218.5p.

FedEx’s business volumes are closely linked to the general health of the world economy, which means it is considered an economic bellwether.

WHY IS FEDEX CAUTIOUS?

The company said it expects business conditions to remain ‘challenging’ near term and there remains ‘significant uncertainty’ with respect to the timing of demand recovery, particularly in the back half of its financial year to 31 May 2024.

Should economic conditions support an improving demand environment in the back half of the year the company anticipates modest volume improvement.

Looking forward FedEx said it is committed to reducing capital intensity and expects aircraft related capital expenditures to decrease from 2025 to around $1 billion.

FOURTH QUARTER EARNINGS BEAT

FedEx reported a 28% drop in fourth quarter EPS (earnings per share) to $4.94 which marginally beat Wall Street estimates of $4.89 while revenue fell 10% to $21.93 billion, slightly less than estimates of $22.67 billion.

The company saw a bigger than expected drop in e-commerce as the spike in demand during lockdowns continues to normalise and consumers return to stores and spend more on experiences.

CEO Raj Subramaniam said: ‘FedEx is becoming a more flexible, efficient and data-driven organization as we significantly lower our cost structure, drive enhanced profitability, and deliver outstanding service for our customer.’

FedEx returned around $2.7 billion to shareholders in 2023 through a combination of share repurchases and dividends. It expects to repurchase $2 billion in 2024 and announced a 10% increase in the annual dividend to $5.04 per share.

EXPERT VIEW

Investment director at AJ Bell Russ Mould commented:

‘Interestingly, shares in Fedex are now higher than on the eve of its September 2022 warning about a global recession. The stock slumped on that warning, yet the market appears to be looking through current concerns in the belief that any economic weakness will be shallow and short-lived.

‘A lot of emphasis was made by Fedex in its latest conference call to cost savings, which is all very well, but one cannot ignore the fact that the backdrop is looking more fragile by the day.

‘In six to twelve months’ time, if the world is looking in an even gloomier place because interest rates have gone up further, just remember there were red flags galore about demand weakness in Fedex’s results and commentary.”

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Martin Gamble) and the editor of the article (Steve Frazer) own shares in AJ Bell.

Issue Date: 21 Jun 2023