FedEx is undergoing a significant transformation under CEO Raj Subramaniam, aiming to cut costs and integrate its Express and Ground networks to improve efficiency. Despite facing competition from Amazon and low-cost operators, FedEx's strategic initiatives and cost-saving measures have boosted investor confidence, reflected in its stock performance. The company is focusing on high-margin areas like healthcare logistics, with promising growth prospects, and aims to return substantial capital to shareholders. If FDX is able to confirm analyst expectations in 1Q25 (and beyond), it could unlock a lot of capital gains, as the market is waiting for confirmation from the company.

One of the things I enjoy doing when I'm bored is going on apps that track global flights. Although it adds zero value, I like to see what is going on at major transportation hubs, including cargo-focused airports like Memphis International ("MEM"), the busiest cargo airport in North America, and the second-busiest cargo airport in the world (did you know that? I didn't).

Because of favorable weather (low risk of canceled flights) and a strategic geographic location, the company leases more than 34 million square feet, employs more than 11,000 people, and operates almost 400 flights per day in Memphis. These operations allow the company to handle more than 180 thousand packages and a quarter of a million documents. Every single hour.

Reading these statistics and monitoring these flights shows just how critical some of our biggest transportation companies are.

That said, while FedEx is a "mission-critical" company, it's busy adapting to an increasingly tough operating environment, including economic headwinds and new competition.

My most recent article on this company was written on March 10, when I went with the title "FedEx Investors: Is Amazon Eating Your Lunch?"

Back then, I showed the chart below, which clearly displays the struggles of both FedEx and UPS (UPS) when it comes to their total parcel volumes. In early 2020, Amazon (AMZN) overtook FedEx's total parcel volume. Two years ago, it also beat UPS.

Hence, as we head into the company's 1Q25 earnings release, I'll use this article to update my thesis and discuss FedEx's business transformation - including the risk/reward for (dividend) investors, as I believe we could be looking at an impressive turnaround.

The Challenges Of FedEx
Thomas Black, industrial and transportation export for Bloomberg, wrote an article last month, titled "FedEx Faces Obstacles on Its Way to Look More Like UPS."

Although the title is a bit downbeat, it starts with very good news, including that the "new" CEO is looking to cut costs aggressively, including through a spin-off.

FedEx Corp.’s Chief Executive Officer Raj Subramaniam seems to be making all the right moves in his push to transform the courier after taking over from founder Fred Smith about two years ago. He has promised to add $6 billion to profit by May 2027 through broad cost cuts and the combination of the company’s two distinct delivery networks. Subramaniam also excited investors by announcing a strategic review of the freight unit, which could result in a spinoff worth $30 billion or more.

So far, this news has been well-received by investors, as FedEx has outperformed the market and UPS on a year-to-date basis (through August 6).

Over the past five years, FDX has returned 79%, lagging the market by roughly 20 points but beating UPS' 23% total return by a considerable margin.

Going forward, FedEx is all about simplification.

According to the Bloomberg article, FedEx is looking to integrate Express and Ground networks. Historically, these segments have operated independently. While it makes sense to streamline the business, it's a tough job, as the company works with thousands of contractors.

Unlike UPS, FedEx has major insufficiencies, which include contractors facing delays, as drivers often have to wait for packages to be loaded or have to rearrange these packages themselves.

It also struggles with a high turnover rate among contractors. Although FedEx pays contractors, these contractors are responsible for their own costs. According to the article, this results in pressure on wages, making peers like UPS more competitive.

Essentially, for the time being, it's a trade-off, as UPS struggles from the power of unions, whereas FedEx has operating inefficiencies. Finding a balance is a tough task.

On a side note, the fact that both UPS and FedEx have issues is a reason why I have avoided both stocks, as I preferred more efficient railroads or non-unionized less-than-truckload companies like Old Dominion Freight Line (ODFL).

This brings me to issues faced by both companies, as FreightWaves wrote in a recent article titled "FedEx and UPS must adapt to changing parcel landscape."

Although the boom in e-commerce has been great for total logistics demand, it also resulted in more shipments directly to the customer. When adding the emerging trend of ultra-low-cost retailers from China (i.e., Temu), we get an environment where smaller companies like Better Trucks, Jitsu, Veho, and others operate at much lower costs.

While it's fair to assume some of these low-cost operators will not survive, it still forces FDX and UPS to compete on cost.

“In Walmart U.S., over the last 12 months, 4.4 billion items were delivered the same or next day, with about 20% of those delivered within three hours,” Walmart CEO Doug McMillon stated on the company’s May 16 earnings call.

That means Walmart delivers over 4 million parcels per day from its 4,600 local stores by deploying alternate approaches, including the use of gig workers at companies like Uber Eats and DoorDash typically known for food delivery.

The quote above is a perfect example of challenges faced by FedEx (and UPS), as supply chains have become shorter. One of the biggest trends in real estate I have discussed since the pandemic is the surge in warehouses. Companies (like Walmart) want to shorten the distance to their customer, which has caused the percentage of parcels that travel fewer than 300 miles to increase from 45% to 68% over the past ten years.

According to FreightWaves, peak season in 2026 will see more parcel volumes shipped by private fleets from major retailers than FedEx and UPS combined - that's more than 40 million parcels per day.

In other words, FedEx needs to streamline one of the biggest transportation companies on the planet to compete with more agile newcomers.

So far, it looks like the company is succeeding.

There's Good News
As its stock price suggests, investors have confidence that FedEx will be able to transform itself.

In its most recent quarter (4Q24), the company reported good news, including that it achieved its CapEx (capital expenditures) target of less than 6.5%.

Initially, this was its FY2025 target. The reduction in CapEx was one of the reasons why the company returned roughly $4 billion to shareholders, almost 6% of its current market cap.

In FY2025, it expects to return another $3.8 billion to shareholders, including $2.5 billion through buybacks.

Moreover, in FY2024, the company achieved $1.8 billion in cost savings through its DRIVE initiative. Meanwhile, the One FedEx integration is on track, supported by Network 2.0, which includes the launch in Canada. In Canada, the transition is expected to be completed in the first half of FY2025.

On June 1, we reached an important milestone in our transformation, what we call One FedEx. This is the consolidation of FedEx Express, FedEx Ground, and FedEx Services into Federal Express Corporation. There are many benefits. This foundational step improves efficiency and reduces costs, allows our teams to move with speed, and make it easier for our team members to manage their FedEx careers. In Q4, we also continued to roll out Network 2.0, including the launch in Canada, our largest market yet. In the first half of FY '25, we will complete the Canada transition and optimize dozens of additional locations in the U.S. We expect to significantly pick up the pace into FY '26.

In general, the company is doing quite well, especially considering consumer weakness.

In 4Q24, it reported flat revenues in its Express business, 2% higher revenue in its Ground business, and 2% higher Freight revenues. It was also able to stabilize yields in FY2024, "ignoring" ongoing challenges in the retail space.

Moreover, like UPS, the company is moving into higher-margin areas. If there's one thing newcomers cannot compete with, it's specialized transportation, including healthcare shipments.

Currently, its healthcare business is generating more than $1 billion in annualized revenues, supported by the company's massive platform that provides real-time visibility for high-risk shipments. This also includes high-value facilities like its new European Life Sciences Center in the Netherlands.

Straits Research believes the global healthcare logistics industry could grow by almost 8% per year, reaching more than $340 billion by 2032.

Although it takes time to re-position multi-billion corporations like FedEx, these are very promising developments.

Going Into 1Q25
In June, the company's outlook for its 2025 fiscal year was very optimistic, as it issued an EPS guidance range of $20 to $22. The company also expects low to mid-single-digit revenue growth thanks to improved parcel demand in the United States.

Moreover, one of the key growth drivers includes the tightening of air and sea freight capacity, especially from Asia, which should enhance yields.

Furthermore, the company expects an incremental $2.2 billion benefit from its DRIVE cost-savings initiative, which is something to keep an eye on when the company comments on its turnaround progress.

Also, note that the company will use two reporting segments starting in 1Q25:

Federal Express Corporation. This includes the former FedEx Express, FedEx Ground, and FedEx Services.
FedEx Freight. This consists of the former FedEx Freight segment and FedEx Custom Critical.

These 1Q25 earnings will be reported on September 19 after the market closes. Using Nasdaq data, analysts expect $4.87 in EPS (+7%). This is based on nine estimates, including one up revision and two down revisions, over the past four weeks.

Personally, I do not care if FDX earnings come in a few pennies above or below estimates. What matters to me is if we encounter any major outliers. I also want to know if the company adjusts its cost-savings outlook and/or comments on industry weakness.

If the company reports good numbers and continues to see a bottom in demand, I believe the entire industry could see an upswing.

Moreover, as we'll discuss in the next part of this article, analysts are upbeat. If the company is able to confirm these expectations, there's likely a lot of room for upside.

Valuation
Now comes the best news.

Analysts seem to be convinced FedEx can pull off a turnaround.

Using the FactSet data in the chart below, FedEx is expected to grow its EPS by 18% in its 2025 fiscal year. The two years after that are expected to see 16% and 17% growth, respectively.

Moreover, FDX trades at a blend P/E ratio of 15.3x, more than a point below its long-term average.

Technically speaking, if the company can convince investors its turnaround is on track, the company has a fair stock price target of $470, more than 60% above the current price.

I believe the only reason the stock seems cheap is uncertainty regarding its turnaround. If management can report good results and provide upbeat comments during its call, I would not want to be a short seller.

Takeaway
FedEx is navigating a tough environment, but its turnaround efforts are promising.

The company is cutting costs aggressively, consolidating its operations, and focusing on higher-margin sectors like healthcare logistics.

With strong investor confidence, growing earnings expectations, and a fair valuation, FedEx could be in a great position for a rebound.

However, I'll be paying close attention to its upcoming earnings to see if management can deliver on its cost-saving goals and how it responds to ongoing industry challenges.

If things stay on track, this stock could have significant upside potential.

Pros & Cons
Pros:
Turnaround: FedEx is making all the right moves to streamline operations, with major cost-cutting initiatives and a strategic focus on higher-margin areas like healthcare logistics.
Valuation: The stock is trading below its historical P/E, offering a potential 60% upside if the turnaround continues.

Cons:
Execution: Integrating operations and fixing inefficiencies is a huge task, and any missteps could weigh on the stock.
Competition: Smaller, more agile competitors and rising e-commerce trends create a challenging environment.
Economic Growth: FedEx's business is tied to global economic cycles, so a slowdown in economic growth could impact demand.
Uncertainty: While the stock seems cheap, doubts about FedEx's ability to fully execute its turnaround remain an issue.

FedEx: A Turnaround With Significant Upside Potential (NYSE:FDX)

FedEx is undergoing a significant transformation under CEO Raj Subramaniam, aiming to cut costs and integrate its Express and Ground networks to improve efficiency.