FedEx (FDX) Delivers Nice Gains For Investors Thanks To Some Robust FY23 Guidance Despite Headwinds
2:55 pm Friday, June 24th, 2022
FedEx (FDX) is delivering some nice gains for investors today despite basically in-line results for Q4 (May). Technically, it was a very slight miss on EPS and revenue, but results were generally in-line. So why is the stock higher?
What jumps out at us is the upside EPS guidance despite some headwinds that the industry is facing. FedEx has been talking about focusing more on higher quality revenue, meaning focusing more on attractive yields and not pursuing volume at any cost. The impressive guidance shows FDX is making some progress there. Another example is FedEx Ground and FedEx Express generating yr/yr revenue growth of 4% and 6%, respectively, despite lower volume levels.
Speaking of headwinds, FDX believes consumers will keep spending, but their spending will continue tilting towards services from goods, which is not great for FDX. Also, FDX expects more consumers to return to stores which should pressure B2C volumes. Through May, industrial activity has been solid, but after a strong build late last year and early this year, inventory restocking is slowing. FDX expects this will dampen freight demand.
FDX also concedes that global trade growth has slowed from disruptions related to lockdowns in China and the conflict in Ukraine, limiting the flow of goods. The good news here is that belly capacity on passenger airlines should remain constrained in FY23, which should result in favorable pricing for FedEx.
FedEx is not expecting a quick snap back in demand. The lower customer demand trends it saw in MayQ have continued into June and FDX expects Q1 (Aug) volumes will continue to be pressured.
In addition to higher quality revenue, FDX is also aggressively targeting customers who value FedEx’s capabilities. Namely, FDX notes that it’s the only provider to bundle its parcel and LTL portfolio. Also, FedEx Ground is faster to more locations than UPS Ground, and FedEx Ground delivers on Sunday while UPS does not. This capability was developed during the pandemic
Overall, the Q4 results were decent but not great. It is clear that consumers are shifting their spend to services/travel and away from goods. As such, we think investors were bracing for some downside guidance in FY23, especially with a new CEO just taking the helm on June 1. New CEOs tend to prefer to start out with conservative guidance. We commend FDX for focusing on higher quality revenue and pushing its unique capabilities. This seems to have blunted the impact of declining demand.
The impressive guidance also bodes well for UPS ahead of its Q2 earnings report next month. Speaking of UPS, FDX trades at a P/E discount to UPS (10.5x at mid-point of guidance vs 14.4x for UPS) but perhaps that starts to narrow.
