FedEx shares fell more than 7% in premarket trading on Wednesday as investors looked past better-than-expected quarterly earnings and focused on shrinking margins at the company’s core delivery business and the uncertainties created by its recent freight spinoff.
The delivery giant recently separated its highly profitable trucking unit, FedEx Freight, as part of a strategy to sharpen its focus on its parcel delivery operations.
The move has placed the slimmed-down company under increased scrutiny, with investors looking for evidence that it can improve profitability and control costs independently.
Delivery margins come under pressure
The operating margin in FedEx’s Federal Express segment declined to 7.7% in the latest quarter from 8.4% a year earlier.
The deterioration was driven by higher employee compensation costs as well as increased spending on outsourced transportation and fuel.
The margin pressure comes at a difficult time for logistics companies.
Both FedEx and rival UPS have been grappling with lower shipment volumes amid changing US trade policies and rising fuel prices linked to the conflict involving Iran.
The removal of duty-free “de minimis” treatment for low-value e-commerce imports tied to China-linked online retailers such as Shein and Temu has also weighed on shipping demand.
Earnings beat overshadowed by transition concerns
FDX reported fourth-quarter revenue of $25 billion and adjusted earnings of $6.31 per share.
The earnings figure included adjustments related to the freight spinoff and changes in retirement plan accounting.
Analysts polled by FactSet had expected revenue of $24 billion and adjusted earnings of $5.96 per share.
For the full fiscal year ended in May, adjusted earnings came in at $20.24 per share, topping analysts’ estimates of $19.86 and exceeding the company’s prior guidance range of $19.30 to $20.10 per share.
However, investors remained focused on the company’s forward outlook.
FedEx forecast annual earnings of $16.90 to $18.10 per share as it transitions to a calendar-year reporting period from its previous May fiscal year-end.
Because the guidance only covers the company’s delivery operations following the freight separation, analysts have not yet developed comparable models, making it difficult for investors to assess the outlook.
“It will be difficult to judge numbers for a few quarters given the noise, but focus will be on fundamental debates,” Morgan Stanley analysts said.
JP Morgan analysts also warned that the company could face a period of uncertainty.
“We recognize FedEx could experience an overhang during the time it will take for the market to sort through the different moving pieces of the Freight spin-off and shift to a calendar year reporting period,” they said.
Citi analysts noted that expectations heading into the results were elevated, with FedEx shares having gained roughly 75% over the past year.
They added that confusion surrounding the freight spinoff, which took effect on June 1, may have contributed to the negative market reaction.
Analysts remain constructive on long-term prospects
Despite the near-term uncertainty, some analysts remain optimistic about FedEx’s long-term outlook.
FedEx currently trades at 14.68 times projected forward earnings over the next 12 months, slightly above UPS’s multiple of 14.05.
Jefferies analyst Stephanie Moore said margins in FedEx’s delivery operations are likely near their lowest point and should improve over time through technology investments and operational efficiencies.
According to Moore, FedEx’s margins remain less than half those of competitor Old Dominion.
She expects initiatives, including a new sales strategy and technology improvements that increase package density in trucks to help expand margins by 350 basis points by 2029.
She also expects the company to benefit from a broader recovery in freight markets and has initiated coverage on FedEx with a buy rating.
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