FedEx (FDX 0.01%) reported a solid quarter despite a difficult operating environment, and its shares were in the fast lane as a result. Shares of FedEx climbed 16.4% in March, according to data provided by S&P Global Market Intelligence, on signs that the company's streamlining plan is on track.
Cost cutting saves the day
It is a tough time to be a shipping company. A combination of higher costs and slowing demand due to concerns about the economy has crimped results and sent shareholders fleeing from FedEx shares in 2023.
But FedEx is not standing still as the macro economy takes its toll. The company is working on ways to shed billions in annual costs via better asset utilization and targeted layoffs.
Investors saw some of the benefits from that plan when fiscal third-quarter results were announced in mid-March. FedEx easily topped Wall Street profit estimates despite revenue that fell short of expectations. The company's operating margin for the quarter was 6.2%, an improvement from the 5.3% margin in the same quarter a year ago.
Management said its cost cutting is on pace to contribute about $1.8 billion in annual savings in the current fiscal year, and another $2.2 billion in fiscal 2025. The company will need to continue to find ways to grow more efficient, since it expects revenue to remain pressured for the foreseeable future.
Is FedEx stock a buy following its strong March performance?
CEO Raj Subramaniam is bullish about the company's plan, saying post-earnings that "I've never been more confident in our path ahead as we build a more flexible, efficient, and intelligent network." FedEx is doing the best it can in a tough environment, hopefully setting itself up for strong profitability when the economy brightens.
FedEx is an important part of the global economy, but investors need to understand and accept that the company's growth is tied to the economy. This isn't a stock that is likely to grow revenue by double digits annually, and the cyclical nature of the business means there will be times when revenue doesn't grow at all.
What FedEx can manage is its costs, and management appears to be doing a good job of that. It is also a cash-generation machine, offering investors a 1.8% dividend yield and a newly authorized $5 billion share repurchase plan. The buyback should help continue a trend that has seen FedEx reduce its share count by 14% over the past decade. The lower share count means investors own more of the company with each share they own.
For investors looking for a steady income stream with some potential for upside along with the global economy, FedEx is a stock that deserves a place on your radar screen.
