DRIVE, Network 20 And Tricolor Efforts Will Improve Global Efficiency

Key Takeaways

• Cost-saving initiatives and network optimization projects are set to enhance FedEx's margins and earnings through improved efficiency and reduced expenses.
  
• Strategic investments and technological enhancements, including in Europe, aim to drive revenue growth and improve customer experiences.
  
• Various external and internal challenges, including contract expiration, economic pressures, and restructuring risks, threaten FedEx's revenue stability, margins, and future profitability.

Catalysts

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

• FedEx's DRIVE initiative is achieving significant cost savings, with a target of $2.2 billion for FY '25 and a total of $4 billion compared to the FY '23 baseline. This initiative is expected to enhance net margins through structural cost reductions.
  
• The Network 2.0 project aims to optimize 50 U.S. stations, streamlining operations to improve efficiency. By enabling about 12% of FedEx's daily global volume to flow through optimized facilities by the end of FY '25, this initiative should positively impact operating margins and earnings.
  
• The Tricolor strategy improves asset utilization by optimizing aircraft density and leveraging the surface network. Progress in this area has already increased payloads and density in the air network, which should lead to revenue growth and enhanced net margins.
  
• FedEx's strategic initiatives in Europe, including a simplified technology platform, have led to improved operational efficiency and better customer experiences. This progress is expected to drive profitable share growth and improve revenue from the European market.
  
• The acquisition of RouteSmart Technologies will support FedEx's global route optimization, enhancing efficiency across the network transformation efforts. This is anticipated to reduce costs and enable better earnings performance.

FedEx Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FedEx's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 6.1% in 3 years time.
• Analysts expect earnings to reach $5.9 billion (and earnings per share of $26.4) by about April 2028, up from $3.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, up from 12.8x today. This future PE is lower than the current PE for the US Logistics industry at 16.2x.
• 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 8.07%, as per the Simply Wall St company report.

FedEx Future Earnings Per Share Growth

Risks

• The expiration of the United States Postal Service contract and severe weather events are cited as significant headwinds, impacting adjusted operating income at Federal Express Corporation. This could create challenges for FedEx's revenue and earnings sustainability.
  
• Weakness in the industrial economy continues to pressure higher-margin B2B volumes, particularly affecting Freight, resulting in fewer shipments and lower weights, which could negatively impact FedEx’s revenues and net margins.
  
• The ongoing challenges in the global industrial economy, inflationary pressures, and the uncertainty surrounding global trade policies are leading to a reduction in FedEx's FY '25 adjusted EPS outlook. This could pressure future earnings.
  
• FedEx has experienced significant pricing and yield pressures in international shipping markets, which, compounded with increased demand for lower-yield deferred service offerings, could impact revenue quality and operating margins.
  
• The changes and eventual separation of FedEx Freight and the costs associated with restructuring initiatives may introduce execution risks and additional expenses, potentially affecting financial stability and future profitability.

Valuation

• The analysts have a consensus price target of $277.778 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 $354.0, 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 $96.5 billion, earnings will come to $5.9 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 8.1%.
• Given the current share price of $209.85, the analyst price target of $277.78 is 24.5% 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.