Why FedEx is down after a strong quarter — and its impact on our rating

FedEx had a strong quarter on Tuesday, but the delivery company's shares are falling in after-hours trading, which we view as a misreading of the results. Revenue in the fourth quarter of fiscal 2026 was $25 billion, above the $24.04 billion consensus estimate, according to estimates compiled by LSEG. LSEG data showed earnings per share (EPS) rose 4% to $6.31, beating expectations of $5.96. FDX 1Y mountain FedEx 1-year return Bottom Line As the owner of the recently spun-off FedEx Freight, FedEx delivered exactly what investors wanted in its latest quarter: it did well on both the top and bottom lines. So why are so many sales made outside working hours? Likely culprits: Investors unhappy with margin misses and forward earnings guidance for the rest of the year. Let's start with the reported quarter's operating margin of 8.35%, which was below the estimate of 8.44%. While this type of miss is disappointing, sellers may be overreacting in this situation. Here's why: FedEx is a shipping and logistics company that passes fuel costs on to customers through fuel surcharges; this is a dynamic that increases revenue and tightens margins but does not impact earnings. When you factor in fuel costs, revenue increases (5 percentage points in the latest quarter), but that incremental growth carries a 0% profit margin because the goal is to offset higher fuel expenses, not make a profit on them. As a result, although earnings are largely unaffected, overall margins are tightening. Members who follow our Linde coverage may notice a similar dynamic as the company also uses contractual energy cost transfer clauses. The key takeaway from the conference call was that FedEx did not see any drop in demand due to fuel surcharges. In fact, without the additional wage dynamic, operating margin would have increased year over year. As for the earnings guidance, which likely disappointed some investors, it's worth noting that CEO Raj Subramaniam has historically been conservative (under-promise, over-deliver) in setting estimates. This is likely even more true as the company is just beginning to improve its operations following the return of FedEx Freight. Additionally, the company announced a $1 billion share buyback that is expected to support further earnings growth. Why we have it FedEx is transforming itself into a leaner, more profitable organization under the leadership of CEO Raj Subramaniam. The remaining FedEx is spinning off its shipping unit and focusing on package and logistics services while also focusing on high-margin end markets. Competitors: UPS Last acquisition: May 18, 2026 Start date: May 18, 2026 Earnings growth will also come from business initiatives. Management touched on the recent official launch of FedEx Life Science, which provides specialized transportation services for the healthcare industry, where packages can be both time- and temperature-sensitive, accelerating growth in artificial intelligence. “The AI and data center space is an evolving and rapidly scaling growth engine that is driving double-digit revenue growth for us,” Brie Carere, FedEx chief customer officer, said on the call. "This space represents a horizontal ecosystem rather than a narrow vertical space. We are capturing demand across the entire value chain, from traditional hyperscalers to the industrial and energy infrastructure that supports these massive structures." Bottom line: We knew this report would be tentative, even messy, given the separation of FedEx Freight and FedEx's decisions to realign its fiscal year with the calendar year. As a result, our focus is on reported results and management's interpretations of the guidance, rather than the actual numerical guidance. We were pleased with what we saw and heard. Therefore, we maintain our #1 rating and $380 price target; This represents an increase of approximately 20% from Tuesday's closing price and 28% from the next closing price. Comment During the call, Subramaniam said the company has increased its revenue in the most privileged areas of the global economy. The 14% revenue growth at Federal Express Corporation, or “FEC” (its remaining operating segment), was driven by rising returns and increased volume across nearly all of its services. In the U.S., revenue increased approximately 13% year over year, roughly driven by: 14% year over year primarily, 13% year over deferred, 12% onshore In its international export business, FedEx achieved approximately 9% year over year growth in economy shipping, as well as approximately 20% year over year growth in priority shipments. Finally, revenues in international domestic operations, which refer to international domestic operations, increased by approximately 6% compared to last year. In the dedicated Transportation segment, the company reported: 17% annual growth in the U.S. 20% annual growth in the international priority business 16% annual growth in the international economy business Guidance Management forecasts earnings of $16.90 to $18.10 per share, driven by 11% revenue growth (with 3 percentage points attributable to fuel surcharges) compared to the pro forma fiscal year 2025 revenue of approximately $82 billion. We cannot offer an apples-to-apples estimate on the forecast due to management's decision following the FedEx Freight separation to change the fiscal year to align with the calendar year rather than ending on May 31 as it has in the past. Some Wall Street analysts may find the earnings guidance a bit light. Wells Fargo analysts, for example, said in a preview note on June 17 that they were looking for guidance closer to $18 per share, as opposed to the company's midpoint estimate of $17.50 per share. That said, top-line growth of 11% is solid, and we wouldn't be surprised to see earnings guidance remain conservative, as noted above. (Jim Cramer's Charitable Trust is long FEDX. See here for a full list of stocks.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation's portfolio. 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