FedEx (NYSE:FDX) stock gained about 5.77% in after-hours as the company crushed analysts’ earnings estimate for Q1 FY24 despite ongoing demand weakness. The big earnings beat reflects improved volumes and profitability in the Ground (small-package ground delivery services) segment. Following better-than-expected Q1 earnings, Goldman Sachs analyst Jordan Alliger maintained his bullish stance on FDX stock. Alliger also increased his price target on the transportation, e-commerce, and business services provider to $291 from $278.
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With this background, let’s delve into FedEx’s Q1 performance.
Q1 Earnings Handily Surpassed Estimate
FedEx delivered adjusted earnings of $4.55 per share in Q1 compared to $3.44 in the prior-year quarter. Moreover, earnings came significantly higher than the Street’s estimate of $3.71 a share. FedEx’s solid Q1 earnings reflect outstanding performance in the Ground segment, which delivered higher volumes and operating income. Further, the company’s continued focus on revenue quality and structural cost reduction through the DRIVE program cushioned its bottom line.
At FedEx Ground, revenue increased 3% year-over-year, reflecting a 1% improvement in volume and a 3% rise in yield. The year-over-year volume growth was aided by the threat of a strike at UPS (NYSE:UPS). Investors should note that customers shifted their volumes away from UPS to FedEx to avoid disruptions from a possible strike.
FedEx Ground’s improved top-line performance and cost reductions led to a 59% year-over-year growth in its operating income. Moreover, the cost per package fell more than 2% due to lower line-haul expenses and improved productivity.
Despite the strong performance in FedEx Ground, the company’s overall revenue of $21.68 billion came below the prior-year quarter’s revenue of $23.24 billion, reflecting lower volume in FedEx Freight (provider of less-than-truckload freight transportation services) and FedEx Express (provides express transportation service). Moreover, it fell short of analysts’ estimate of $21.74 billion.
As FedEx is performing well on the bottom line front despite volume pressure, let’s look at what the Street recommends for its stock.
Is FedEx Stock a Good Buy?
Alliger expects FedEx to benefit from the recovery in volumes and the company’s focus on significantly reducing its costs. In addition, the analyst finds FedEx’s valuation “attractive.” Including Alliger, FedEx stock has 12 Buy recommendations. Meanwhile, four analysts recommend a Hold. Overall, FDX stock has a Strong Buy consensus rating on TipRanks.
Analysts’ average price target of $285.27 implies 13.87% upside potential from current levels.
Bottom Line
FedEx is consolidating its operations to create efficiency and generate cost savings to combat weak demand. FedEx Express, FedEx Ground, and FedEx Services will consolidate into one company – Federal Express Corporation, in June 2024. This will enable the company to reduce and optimize overhead costs, streamline its go-to-market capabilities, and improve the customer experience. FedEx expects to generate $4 billion in permanent cost reductions through these initiatives in Fiscal 2025.
The company’s focus on taking out structural costs, optimizing operations, and expected volume recovery are anticipated to support its financials and stock price. However, investors should be cautious as Amazon (NASDAQ:AMZN) has once again revived its shipping service, posing challenges for logistics companies like FedEx and UPS.
