FedEx

Excluding FedEx Freight (spun off on June 1), FedEx's total pro forma revenue grew 12% in third-quarter 2026 (ended September), on surging fuel surcharges, core pricing gains, and higher domestic volumes. This is the firm's first earnings release since shifting to calendar-year reporting.

Why it matters: Adjusted pro forma consolidated margin, excluding Freight, was up slightly on a favorable international trade-lane mix and higher export volumes. US domestic adjusted margin fell 20 basis points due to fuel surcharge margin dilution, elevated purchased transportation costs, the new pilot agreement, and higher variable compensation. US domestic package volumes grew 2% on solid business wins over the past year among premium business-to-business shippers. This was partly offset by intentional shedding of lower-yielding ground economy business (down 4%). International package volume fell 4% as the firm continues to shed international-domestic packages in favor of higher-yielding international export business (out of Asia and the US), which increased in the quarter.

Coming up: Management expects calendar year 2026 revenue growth of 12% (previously 11%), a "slight" increase in total adjusted operating margin (versus a pro forma 6.1% in 2025), and adjusted EPS of $18.00-$18.60 (previously $16.90-$18.10).

The bottom line: We do not expect to materially alter our $257 fair value estimate for narrow-moat FedEx, as our longer-term revenue and margin assumptions will likely remain intact. The shares trade in modestly overvalued territory. In our view, the market is awarding a premium multiple for the firm’s impressive volume and margin execution over the past year, leaving little room for error.

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Following the June 1 spinoff of its LTL shipping division, FedEx Freight, we adjusted our DCF-derived fair value estimate for FedEx to $257 per share, from $276, to reflect the stand-alone prospects of the firm's flagship global parcel delivery operations. FedEx has yet to provide pro-forma historical financials (for RemainCo), thus uncertainty surrounding our overall model forecasts for the next few years is elevated. Note that our fair value estimate incorporates our roughly estimated impact of FedEx's 19.9% retained ownership stake in Freight, along with the $4.1 billion dividend received from Freight.

In fiscal 2025 (ended May), consolidated revenue was flat as higher package revenue was offset by lower LTL-segment tonnage and the expiration of the United States Postal Service airlift contract. Federal Express segment package revenue grew 2% on improvement in US domestic B2C volumes (favorable e-commerce trends) and as international activity benefited from a pull-forward of imports ahead of tariffs. That said, industrial end markets remained sluggish for B2B activity, and yields faced unfavorable mix and lower peak-season surcharges on international export business. Organic LTL segment revenue fell 5.5% on industrial end-market weakness.

Adjusted operating margin fell slightly in fiscal 2025, to 7.0% (from 7.1%), on lower LTL segment profitability. The Federal Express division's adjusted operating margin increased only modestly to 7.1% (from 7.0%), but was much better than the 5.7% posted in fiscal 2023. Despite headwinds from the sluggish industrial sector, unfavorable mix, and cost inflation, profitability improved on Drive-related capacity rationalization. The firm met its targeted structural cost savings target of $2.2 billion for the year. LTL segment margin deteriorated to 16.7% (from 20.0%) on lower tonnage.

In fiscal 2026, FedEx benefited from strong new account wins and rising wallet share among business-to-business shippers in healthcare, data center, and automotive end markets, which bolstered US domestic package volumes despite otherwise soft US industrial production and muted retail sector restocking. Consolidated revenue rose 8%, with Federal Express revenue up 9% and FedEx Freight revenue down 1% on stubbornly soft (albeit stable) industrial end markets.

On the profitability front, FedEx faced unfavorable mix shifts in fiscal 2026, with declining high-margin China-to-US international export volumes stemming from the termination of the US de minimis provision for low-value imports. However, thanks to impressive structural cost takeout, the Federal Express segment's adjusted margin improved to 7.7%. FedEx Freight's margin deteriorated on lower tonnage; thus, consolidated adjusted operating margin was flat at 7%.

Following the June FedEx Freight spinoff, FedEx will switch to a December calendar year-end—our model follows suit. On a pro forma basis, we model total revenue growth near 11% in calendar 2026, reflecting solid new business wins over the past few years. We also look for industrial end market recovery and a cyclical uptick in retailer restocking, which should incrementally boost organic B2B package demand. Strong yield (revenue per package) gains will contribute to revenue growth as well, thanks to healthy core pricing conditions, favorable mix, and a jump in fuel surcharges. We model slower revenue growth in calendar 2027 on tough package volume comps (off robust business wins) and normalizing fuel surcharges, but we are assuming the demand and core pricing backdrop remain healthy.

We bake in total adjusted package segment margin gains to 7.8% in calendar 2026 (from our rough 7.5% pro forma estimate), with incremental improvement to 8% in 2027 and 8.3% in 2028 as network optimization continues.

In our view, FedEx’s flagship express and ground package delivery operations enjoy significant competitive advantages rooted in cost advantage and efficient scale, which drive our narrow moat rating. FedEx is capable of keeping would-be competitors at bay for a prolonged period. Nonetheless, despite lofty entry barriers in global parcel shipping, we constrain FedEx's moat to narrow rather than wide because we expect the firm to outearn its cost of capital by only a slim margin. However, given its solid competitive positioning and assuming that Amazon refrains from offering its package delivery capacity to the broader marketplace in an irrational manner, we think FedEx will more likely than not post normalized excess returns on average for at least the next 10 years.

FedEx, UPS, and DHL Express dominate the global parcel shipping landscape (FedEx and UPS in the US, DHL in Europe), and the networks these providers have erected constitute formidable barriers to entry. Holding constant Amazon insourcing more of its own package delivery needs, we think it’s unlikely that any other company will attempt to replicate a truly global parcel shipping network. This is because of the immense financial losses an upstart would incur while trying to amass the volume and network density necessary to absorb the remarkably high capital outlays and fixed costs associated with a national or global parcel delivery network. To replicate a network of planes, trucks, sorting facilities, rights to fly, and skilled employees, a new entrant would face massive investment before it could win a critical volume of customers from the large existing providers.

Efficient scale applies in this context because a new entrant would have no choice but to replicate FedEx’s sprawling asset base in the absence of economic package flow, yielding a long period of painful losses and creating a major barrier to rational would-be competitors. DHL Express’ decision in 2009 to exit the US domestic package market after six years of painful losses illustrates the power of this moat source. Scale-based cost advantages also arise for FedEx due to immense network processing scale and substantial package density, which create lower marginal costs than a potential new entrant.

In May 2026, Amazon announced it was opening up its last-mile parcel delivery network to shippers outside of its own e-commerce network. Historically, the firm has primarily constrained its capacity to meet its rapidly expanding package-delivery needs, but this move puts it in direct competition with FedEx and UPS. We've long considered Amazon's decision to morph into a commercial "for-hire" provider a risk to UPS and FedEx, and that threat is no longer theoretical. That said, our initial take is that the competitive impact will be manageable.

Uncertainty is high, but we suspect Amazon's efforts as a for-hire carrier will focus on opportunistically boosting the utilization of its network, rather than an all-out market share grab from FedEx and UPS that drags industry pricing through the mud for a season.

Amazon's e-commerce platform will likely see healthy growth in the years ahead, as will its internal delivery requirements. Amazon has built out a sprawling last-mile delivery network, but historically, that capacity has had its limits, especially during the all-important peak season. Recall it was UPS' decision to cull its relationship with Amazon—we suspect Amazon still needs UPS for a portion of its delivery needs, and that its overall sorting and delivery will remain bound over the longer term.

FedEx's US ground and international express delivery operations should enjoy positive longer-term tailwinds from e-commerce growth.

FedEx's massive package sortation footprint, immense air and delivery fleet, and global operations knit together a presence that’s extraordinarily difficult to replicate.

During its five-decade history, FedEx has weathered multiple economic cycles. While short-term results may suffer, the company's powerful parcel delivery network is firmly established.

Amazon has expanded its last-mile logistics capabilities over the past decade, raising the risk that its recent decision to offer capacity to shippers outside its own retail network triggers maintained pricing pressure on incumbents FedEx and UPS.

While industrial end markets appear to be improving, economic fallout from US tariffs or an oil price shock could restrict B2B shipment recovery in calendar year 2026.

FedEx will likely continue to face wage and independent contractor cost inflation in the years ahead.