Freight Spin-Off And Global Expansion To Unlock Significant Shareholder Value And Boost Earnings

Key Takeaways

• Separation of the Freight division may unlock shareholder value and boost future revenue and earnings for both entities.
  
• Strategic cost-cutting and international expansion through initiatives like Network 2.0 and DRIVE could enhance margins and drive growth.
  
• FedEx faces challenges from competitive pricing, contract expiration, industrial weakness, and service unbundling, potentially impacting revenue, profitability, and earnings.

Catalysts

Provides transportation, e-commerce, and business services in the United States and internationally.

• FedEx plans to separate its Freight division into an independent company, which enables each entity to focus more on strategic priorities, potentially unlocking significant value for shareholders. This separation is expected to positively impact revenue and earnings growth across both companies in the future.
  
• The company is implementing Network 2.0, aiming for significant cost reductions and efficiencies through integrated operations. With plans to optimize 250 stations by FY '25, FedEx targets approximately $2 billion in savings by the end of FY '27, which should enhance net margins.
  
• FedEx’s DRIVE initiative is on track to yield $4 billion in savings by FY '25, as compared to FY '23, primarily through structural cost optimization and technology-driven changes, indicating a positive future impact on net margins and overall earnings.
  
• International expansion, particularly within Europe and the global airfreight market, is aimed at capturing market share, especially in high-margin segments. This focus is expected to drive revenue growth and improve incremental margins over time.
  
• FedEx plans to continue strong capital returns to shareholders through share buybacks and dividends, supported by expected free cash flow generation, which should positively influence earnings per share (EPS) growth in the future.

FedEx Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FedEx's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 6.3% in 3 years time.
• Analysts expect earnings to reach $6.2 billion (and earnings per share of $27.29) by about January 2028, up from $3.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.7x on those 2028 earnings, down from 17.5x today. This future PE is lower than the current PE for the US Logistics industry at 25.2x.
• Analysts expect the number of shares outstanding to decline by 1.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

FedEx Future Earnings Per Share Growth

Risks

• The separation of FedEx and FedEx Freight poses a risk of customer disruption and potential loss of revenue from unbundled services, which could impact overall revenue and profitability.
  
• The expiration of the U.S. Postal Service contract creates an ongoing revenue headwind, affecting operating profit and overall earnings.
  
• Continued weakness in the industrial economy and competitive pricing pressures are constraining B2B volumes, which are crucial for FedEx's revenue, particularly in the U.S. domestic package and LTL markets.
  
• The challenging demand environment and forecasted continued weakness in the global industrial economy and U.S. manufacturing may result in lower revenue expectations, impacting FedEx's earnings.
  
• The mix shift towards lower-yielding services and pressure on base rates due to a competitive pricing environment could negatively affect yield and profit margins, thereby constraining revenue growth.

Valuation

• The analysts have a consensus price target of $325.73 for FedEx based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $370.0, and the most bearish reporting a price target of just $200.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $98.0 billion, earnings will come to $6.2 billion, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 7.2%.
• Given the current share price of $281.33, the analyst's price target of $325.73 is 13.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.