FedEx falls on lower margins, concerns over Freight spinoff

FedEx shares fell 2% on Wednesday, as lower margins in its core delivery segment in the fourth quarter raised investor doubts about the company's future following the spinoff of its highly profitable trucking unit.

Shares were volatile at the open as investors digested the quarterly update. During premarket trading, shares were down 7%.

FedEx, in a bid to focus on its delivery business, spun off its trucking unit, FedEx Freight, earlier this month. The slimmed-down company is under investor scrutiny to bolster profits and reduce costs.

The operating margin in FedEx's Federal Express segment fell to 7.7% from 8.4% a year earlier as costs climbed for employee salaries and benefits as well as outsourced transportation and fuel.

U.S. logistics firms including UPS and FedEx have been battling volume decline due to changing U.S. trade policies, while the Iran war has pushed fuel prices higher.

The loss of duty-free "de minimis" treatment for low-value e-commerce shipments tied to China-linked discount sellers such as Shein and Temu has also weighed on volumes.

"We recognize FedEx could experience an overhang during the time it will take for the market to sort through the different moving pieces of the Freight spin-off and shift to a calendar year reporting period," J.P. Morgan analysts said in a note.

FedEx executives said on a post-earnings call that higher fuel prices did not hurt its demand, adding that fuel surcharges helped offset rising costs.

FedEx, a bellwether for global trade, forecast annual earnings of $16.90 to $18.10 per share, as it shifts its fiscal year to align with the calendar year from its previous May year-end.

Analysts have not yet built models that enable comparisons with the new forecast, which includes just its delivery operations.

"It will be difficult to judge numbers for a few quarters given the noise, but focus will be on fundamental debates," Morgan Stanley analysts said.

FedEx trades at 14.68 times projected 12-month forward earnings, slightly higher than UPS at 14.05.