An Improved FedEx Can Deliver A New High: This Is Why FedEx results are mixed in the way investors like; margins are wider and earnings robust and sufficient to cover the capital return outlook

FedEx (NYSE: FDX) shares are up more than 5% following its Q1 report for fiscal year (FY) 2024 and could move higher. The results are mixed, the guidance as expected, but the margin and cash flow matter now. The company widened the margin on cost reductions expected to stick, driving a robust outlook for capital returns. Capital returns included $500 million in accelerated share repurchases in Q1 FY2024 and the expectation for another $1.5 billion by the end of the fiscal year. The $2 billion in repurchases are worth more than 3% of the pre-release market cap, and the odds are high that repurchases will continue in FY2025 and beyond.

FedEx Mixed Results Give Investors What They Really Want

FedEx Q1 results were mixed but gave investors what they wanted: margin improvement, an outlook for sustained margin strength, and robust earnings. The $21.78 billion in revenue is down 6.5% YOY and missed the Marketbeat.com consensus by 60 basis points but is offset by significant bottom-line strength.

Results are also mixed on a segment basis, with margins up in 2 of the 3 operating segments and down in the 3rd. Regarding the systemwide volume metrics, the total volume is down 2.2%, led by a 6.7% decline in the US, amplified by weaker pricing.

The news that has the market excited is the operating margin. The operating margin expanded on a GAAP and adjusted basis, with the adjusted margin up 200 basis points compared to last year. This results from $1.8 billion in cost savings the company referred to as permanent. The takeaway is that adjusted $4.55 in EPS is 2000 bps better than expected and 3000 basis points better than last year.

Guidance is equally mixed but reveals an expectation for steady business and enough cash flow to sustain the dividend, share repurchases, and CAPEX spending. The company narrowed the previous guidance to a range that continues to bracket the consensus estimates with the consensus near the mid-point. Assuming business picks up (when business picks up), the company is set up for significant earnings leverage.

Analysts Buy into FedEx's Capital Spending Plans

Among the highlights of FedEx's Q1 report is the capital returns. The stock yields about 2% in dividends and repurchases shares. Share repurchases are expected to total or top $2 billion and not have a material impact on operations or the balance sheet. The company generated over $1 billion of net income in Q1 and has over $7 billion in cash. That's sufficient to repurchase the $1.5 billion in shares still to come and about cover CAPEX plans without adding in earnings for the rest of the year.

CAPEX plans are significant. The $5.7 billion in spending will be focused on modernization, which means EVs for the fleet, batteries, hydrogen fuel cells, charging and refueling networks, robots, automation, and AI. Assuming other major corporations are on the same track, and it looks like they are, the tech sector should be solid, if not strong, in 2024.

The analysts rated this stock a Moderate Buy before the release, and that has not changed. What has changed is the consensus price target, which is moving higher. MarketBeat's tracking tools picked up 3 fresh revisions following the release; all include a price target increase. They see the stock trading near $300 compared to the $256 consensus target, which assumes the stock is fairly valued near recent price action.

The Technical Outlook: FedEx is Trending Higher

FedEx shares are trending higher and appear ready to tackle a new high. The 5% post-release pop confirms support above the 150-day EMA, but there is risk. If the market does not follow through on this signal and begins to sell off, a top may form in the price action. In that scenario, FDX shares could enter consolidation or pull back to firm support levels. If the market does follow through, FDX should set a new high soon. In that scenario, a move to $300 is possible.