FedEx (FDX 2.96%) hit a 52-week low on March 21 after reporting earnings and slashing its full-year guidance. However, the stock has since recovered nearly all of the losses from that sell-off -- although FedEx is still down over 14% in the past year at the time of this writing.
Here's what's driving FedEx's guidance cut and if the dividend stock is worth buying now.
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DRIVE is working
FedEx has made significant progress in cutting costs and improving its operations, which has helped operating income grow faster than revenue.
FDX Revenue (TTM) data by YCharts
At the end of 2022, FedEx unveiled its DRIVE program, hosting an investor presentation in April 2023. In the presentation, FedEx said it had identified roughly $4 billion in value and savings that could be achieved by fiscal 2025. Additionally, its Network 2.0 program would generate another $2 billion in value by fiscal 2027. Network 2.0 aims to combine FedEx's Express segment with its ground division to create a more streamlined network.
In its latest earnings announcement (third-quarter fiscal 2025), FedEx reiterated its full-year fiscal 2025 target of $2.2 billion in permanent cost reductions from its DRIVE program -- including $600 million in savings from the recent quarter -- building upon progress made in fiscal 2024.
FedEx first provided the $2.2 billion target last June, so reaffirming the guidance is an encouraging sign that DRIVE is succeeding. However, FedEx's earnings forecast has not stayed consistent.
In June, FedEx forecast $20 to $22 in adjusted fiscal 2025 earnings per share (EPS), cut the guidance to $19 to $20 per share in December, and then just reduced the guidance again down to $18 to $18.60 per share.
Responding to tariffs
Weaker economic expectations are to blame for the reduced guidance. Trade tensions weren't defined when FedEx reported second-quarter fiscal 2025 earnings in December. Now, the company could see pricing pressure and cost inflation from tariffs, which could slow transportation volumes. On the latest earnings call, FedEx said that many of its customers are already anticipating price increases, which could justify a price increase from FedEx to help offset costs.
FedEx has done a good job capturing demand surcharge pricing. Timely deliveries, paired with DRIVE cost reductions, could help protect FedEx's margins even during a challenging macro environment. FedEx is an international business, but it's worth noting that the majority of deliveries are in the U.S.
FedEx CEO Rajesh Subramaniam said the following on the earnings call:
As a reminder, in terms of our revenues split by geography, we serve an extremely diversified customer base across the more than 220 countries and territories. To put some numbers around this, taking our FY '25 revenue through the third quarter, nearly 75% comes from our U.S. domestic services. Another approximately 10% of our revenue comes from non-U.S. intra-country or intra-regional services. And from a bilateral U.S. trade perspective, our biggest single-country exposure represents only about 2.5% of total revenue.
In sum, tariffs could be a thorn in FedEx's side, but it has the pricing power to help offset higher costs, and the bulk of its business is domestic.
A bargain-bin valuation
Analyst consensus estimates call for $18.20 in fiscal 2025 EPS and $21.09 in fiscal 2026 EPS. Based on a share price at the time of this writing of $241.07, FedEx would have a price-to-earnings (P/E) ratio of just 13.2 based on fiscal 2025 guidance and 11.4 based on fiscal 2026 results. That's dirt cheap compared to FedEx's 10-year median P/E of 18.4. Granted, investors may want to assume that FedEx's earnings are less than currently expected if trade tensions ramp up and impact delivery volumes.
FedEx pays a stable and growing dividend of $5.52 at the time of this writing -- good for a yield of 2.3%. The dividend is affordable even if earnings come down, so investors can count on FedEx for passive income.
A quality value stock for long-term investors
Transportation companies can go through cycles based on economic growth and trade. Tariffs inherently make trade more difficult, which is bad for FedEx. However, long-term investors shouldn't get too bogged down by economic cycles or trade policy.
FedEx has done an excellent job with its cost-cutting efforts. The company generates strong cash flow to continue funding long-term investments in Network 2.0 and other projects despite a cyclical downturn.
All told, FedEx remains a well-rounded value stock to buy now.
