FedEx (FDX)

Parcel and cargo delivery company FedEx (NYSE:FDX) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, but sales were flat year on year at $22.22 billion. Guidance for next quarter’s revenue was better than expected at $21.79 billion at the midpoint, 0.9% above analysts’ estimates. Its GAAP profit of $6.88 per share increased from $5.94 in the same quarter last year.

Company Overview

Sporting one of the largest air cargo fleets in the world, FedEx (NYSE:FDX) is a global provider of parcel and cargo delivery services.

The growth of e-commerce and global trade continues to drive demand for expedited shipping services, presenting opportunities for air freight companies. The industry continues to invest in advanced technologies such as automated sorting systems and real-time tracking solutions to enhance operational efficiency. Despite the advantages of speed and global reach, air freight and logistics companies are still at the whim of economic cycles. Consumer spending, for example, can greatly impact the demand for these companies’ offerings while fuel costs can influence profit margins.

Competitors offering similar products include UPS (NYSE:UPS), GXO (NYSE:GXO), and Amazon (NASDAQ:AMZN).

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, FedEx’s sales grew at a tepid 4.9% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector and is a poor baseline for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. FedEx’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 1.2% annually. FedEx isn’t alone in its struggles as the Air Freight and Logistics industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

This quarter, FedEx’s $22.22 billion of revenue was flat year on year but beat Wall Street’s estimates by 1.9%. Company management is currently guiding for a 1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 1.4% over the next 12 months. Although this projection indicates its newer products and services will catalyze better top-line performance, it is still below average for the sector.

FedEx has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 26.8% gross margin over the last five years. Said differently, FedEx had to pay a chunky $73.17 to its suppliers for every $100 in revenue.

FedEx’s gross profit margin came in at 28.6% this quarter, down 2.2 percentage points year on year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

FedEx was profitable over the last five years but held back by its large cost base. Its average operating margin of 6.3% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

Looking at the trend in its profitability, FedEx’s operating margin decreased by 1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. We’ve noticed many Air Freight and Logistics companies also saw their margins fall (along with revenue, as mentioned above) because the cycle turned in the wrong direction, but FedEx’s performance was poor no matter how you look at it. It shows that costs were rising and it couldn’t pass them onto its customers.

In Q2, FedEx generated an operating margin profit margin of 8.1%, up 1 percentage points year on year. The increase was encouraging, and because its gross margin actually decreased, we can assume it was more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

FedEx’s EPS grew at an astounding 28.1% compounded annual growth rate over the last five years, higher than its 4.9% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t improve.

Diving into FedEx’s quality of earnings can give us a better understanding of its performance. A five-year view shows that FedEx has repurchased its stock, shrinking its share count by 8.8%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For FedEx, its two-year annual EPS growth of 4.3% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q2, FedEx reported EPS at $6.88, up from $5.94 in the same quarter last year. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

FedEx has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.9%, subpar for an industrials business.

Taking a step back, an encouraging sign is that FedEx’s margin expanded by 4.8 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

FedEx’s free cash flow clocked in at $7.04 billion in Q2, equivalent to a 31.7% margin. This result was good as its margin was 26.1 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

FedEx historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.6%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, FedEx’s ROIC averaged 3.9 percentage point decreases over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

FedEx reported $5.50 billion of cash and $18.27 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $10.16 billion of EBITDA over the last 12 months, we view FedEx’s 1.3× net-debt-to-EBITDA ratio as safe. We also see its $426 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing FedEx beat analysts’ revenue expectations this quarter. We were also glad its revenue guidance for next quarter slightly exceeded Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. The market seemed to be hoping for more, and the stock traded down 5% to $217.80 immediately following the results.

Updated: July 15, 2025 at 11:37 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in FedEx.

FedEx doesn’t pass our quality test. For starters, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its remarkable EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its low free cash flow margins give it little breathing room.

FedEx’s P/E ratio based on the next 12 months is 11.8x. This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $265.36 on the company (compared to the current share price of $230.20).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.