FedEx soars on profit beat, improved margins in its Express unit

By Shivansh Tiwary

(Reuters) -FedEx shares surged on Friday after the parcel giant beat estimates for quarterly profit and reported a higher operating margin at Express, its largest unit.

Shares of the company closed 7.35% higher and added $4.86 billion to its market capitalization. Rival UPS closed 0.6% higher.

With the demand environment being weak, FedEx has taken several measures to protect margins at Express, including parking aircraft, reducing flight hours and efforts to fly fewer jets, with better capacity utilization.

The Memphis, Tennessee-based company also said on Thursday it plans to buy back $500 million worth of its shares in the current quarter, with its board approving a new $5 billion share repurchase program.

Operating margins at its Express overnight-delivery provider rose 2.5% in the February fiscal quarter, from 1.2% a year ago.

“FedEx hit all the high notes this time with lower capex, a reloaded buyback program and a beat in Express off low expectations,” J.P.Morgan analysts said in a note.

However, revenue for the quarter fell 2.3% to $21.7 billion, missing Street expectations of $22.04 billion, according to LSEG data.

Weakness in global trade continues to constrain demand in the company’s international business, which has remained challenged for longer than expected, CEO Raj Subramaniam said on Thursday.

FedEx is seen as a bellwether for global economic trade.

“Revenue is likely to be down again in the May quarter, but it is important to note that the February quarter was the third in a row where revenue declined but operating income rose, which suggests the company’s cost-cutting initiative is working,” TD Cowen analyst Helane Becker said.

The firm also tightened its annual profit forecast and now expects earnings in the range of $17.25 to $18.25 per share, compared to its prior forecast of $17 to $18.50 per share.

Investors have been urging Subramaniam to enhance profitability in the air-based Express segment, amid contract renewal negotiations with USPS and ongoing labor discussions with its pilots.

“FedEx delivered better margin performance at Express despite the challenging revenue/demand backdrop,” Baird analysts said, calling the company’s quarterly performance “one shining moment relative to lower expectations”.

At least 10 brokerages raised their price targets on the stock. Raymond James raised its target by $50, the biggest for FedEx on Friday morning.

Shares of FedEx trade at 12.72 times forward profit estimates, below rival UPS’s 18.01 multiple.

(Reporting by Shivansh Tiwary in Bengaluru; Editing by Pooja Desai)