Digitalization And Rising Costs Will Undermine Future Viability

Key Takeaways

• Structural declines in parcel volumes, rising labor and environmental costs, and intensifying price competition threaten long-term revenue growth and margin sustainability.
  
• Underperformance in international markets and challenges from e-commerce giants could significantly limit global expansion and erode pricing power.
  
• Structural cost reductions, e-commerce parcel growth, market share gains, and disciplined capital allocation position FedEx for stronger margins, earnings, and shareholder value.

Catalysts

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

• The rapid acceleration of digitalization and automation across key industries is likely to reduce the overall need for physical shipments, as virtual goods and services increasingly replace physical ones. This structural change could lead to steadily declining parcel volumes over time, putting sustained pressure on FedEx's long-term revenue growth.
  
• Mounting regulatory pressure related to decarbonization-including stricter environmental standards and emissions targets-is expected to drive a substantial increase in operational costs and capital expenditures for FedEx. Investments required to upgrade fleets, implement carbon-efficient logistics, and comply with global regulations threaten to erode net margins and depress future earnings.
  
• Persistent labor cost inflation, ongoing unionization risks, and associated wage pressures-highlighted by the company's own acknowledgment that wage inflation is not going away-are likely to further compress net margins. FedEx's heavy reliance on a large, distributed workforce makes it especially vulnerable to these long-term cost increases.
  
• FedEx continues to underperform international competitors in critical overseas markets, with ongoing challenges in Asia and Europe. This trend, combined with the onshoring and reshoring of supply chains that cut into lucrative international long-haul business, is poised to limit future global revenue growth and overall margin expansion even as domestic diversification efforts face intensifying cost headwinds.
  
• The ongoing rise of integrated e-commerce giants like Amazon, low-cost regional carriers, and disintermediation by shippers building their own logistics networks will likely intensify price competition and reduce industry-wide yields. This will structurally challenge both FedEx's pricing power and its ability to sustain volume growth, putting further downward pressure on future earnings and returns.

FedEx Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on FedEx compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming FedEx's revenue will grow by 3.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.5% today to 5.9% in 3 years time.
• The bearish analysts expect earnings to reach $5.7 billion (and earnings per share of $25.48) by about June 2028, up from $3.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, down from 13.4x today. This future PE is lower than the current PE for the US Logistics industry at 16.0x.
• Analysts expect the number of shares outstanding to decline by 1.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.6%, as per the Simply Wall St company report.

FedEx Future Earnings Per Share Growth

Risks

• FedEx's ongoing DRIVE initiative and network transformation projects such as Network 2.0 and Tricolor are systematically reducing its structural costs, which can lead to higher operating margins and improved earnings even in a challenging demand environment.
  
• The company is experiencing steady parcel volume growth driven by e-commerce and deferred services, with initiatives like expanded Sunday residential coverage and wins in high-margin verticals (e.g., health care), supporting potential long-term revenue growth.
  
• FedEx is gaining market share in both U.S. and international parcel and airfreight segments, aided by strong service levels, productive sales strategies targeting small, medium, and bundled customers, and share gains in Europe despite a weak economic climate; these trends can lead to higher revenues and robust earnings once the macro environment improves.
  
• The modernization and optimization of FedEx's air fleet, including the acquisition of fuel-efficient Boeing 777s and retirement of older MD-11s, are expected to improve asset utilization and manage capital expenditures efficiently, supporting free cash flow and return on invested capital.
  
• Strategic capital allocation, disciplined cost management, and substantial share repurchases-alongside the anticipated benefits of the tax-efficient Freight spin-off-are likely to increase shareholder value through enhanced earnings per share and higher returns, even amid flat or moderate revenue growth.

Valuation

• The assumed bearish price target for FedEx is $206.04, which represents two standard deviations below the consensus price target of $276.58. This valuation is based on what can be assumed as the expectations of FedEx's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $354.0, and the most bearish reporting a price target of just $200.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $96.4 billion, earnings will come to $5.7 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $218.1, the bearish analyst price target of $206.04 is 5.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.