FedEx (NYSE: FDX) shares surged following the fiscal Q2 2025 earnings report because of its daring plan to unlock value. After careful review, the board has decided to spin off the freight business, which is struggling and offsetting strength in the core FedEx Express operations.
The plan is to do it tax-efficiently, likely a stock distribution expected to be completed within the next 18 months. The remaining business, growing in 2024, is expected to continue growing while improving operating performance, driving cash flow, and delivering robust capital returns to investors.
FedEx Struggles in Q2: Alters Guidance After Accelerating Share Repurchases
FedEx's results are mixed relative to MarketBeat’s consensus estimate but reveal the positive impact of its DRIVE initiative. The company reported $22 billion in net revenue, down nearly 1% from last year. This was weaker than expected but offset by margin strength. The operating margin contracted by 100 basis points but less than expected, leaving the adjusted earnings well above the forecasts. The adjusted $4.05 is more than 1000 bps above the consensus forecast on cost reductions that are expected to stick.
The results are mixed segmentally. The freight segment contracted more than expected on lower volume, more than offsetting growth in the FedExpress business. FedEx Express package revenue grew on the top and bottom lines, with international demand offsetting domestic weakness.
The guidance is good, which is another reason the stock price is shooting higher. The company increased its revenue forecast while trimming the earnings target, leaving both above the consensus target and leading analysts to revise their estimates. FedEx is forecasting revenue to be flat compared to the prior year, up from an expected low-single-digit decline, with the margin widening significantly. Earnings are expected to grow by nearly 10% due to cost savings and share buybacks.
Share buybacks are part of the FedEx story, and they were accelerated in FQ2. The company bought back $1 billion in shares, about 3.7 million, impacting quarterly results by $0.07 per share. Buybacks reduced the count by 3.55% on a weighted average diluted basis and are expected to continue this year and next. The company plans to buy back another $0.50 billion this year, with $3.1 billion left on the current authorization for the next fiscal year.
The balance shows the impact of accelerated repurchases and restructuring, but the net result is positive for shareholders. Highlights include decreased cash, current, long-term, and total assets offset by decreased liability. Equity is down compared to last year, about 1.7%, but more than offset by increased treasury shares. Treasury share value increased by $1.669 billion, more than the decline in equity.
Analysts Shift Gears With FedEx in Q4
The analyst activity in calendar Q4 2024 is promising, and the bullish shift is gaining momentum after the FQ2 release. The first revision picked up by MarketBeat is an upgrade from Loop Capital that includes a significant price target increase. The upgrade is to Buy from Hold, and the price target was increased by $80 or more than 25% to align with the high-end range. The consensus target implies a move to retest the all-time high is coming; the high-end range adds about 25% to it.
The price action following the release is bullish. The market surged about 10% to align with recent highs. The market is indicated to be higher and likely to trend higher over the coming weeks and months, but there is a risk of volatility. The price action has been winding up within a range over the last few months and is below a critical resistance target, the current all-time high. A move to retest that level could trigger profit-taking; a move above it would be a bullish signal, likely leading the market to rally in 2025.
