FedEx (FDX.US) receives strong endorsement from Goldman Sachs after Q3 results: Short-term quarterly volatility and cost pressures persist, but long-term growth trajectory remains steady

According to Zhitong Finance APP, FedEx (FDX.US) released its results for the third quarter of fiscal year 2026 on Wednesday. Benefiting from increased package unit prices, business volume growth, and the continued implementation of structural cost reduction measures, the company's revenue and profit for the quarter both exceeded Wall Street expectations, and it raised its full-year earnings outlook for calendar year 2026. In a research report released after FedEx announced its latest results, Goldman Sachs noted that the company's third-quarter performance exceeded expectations with strong international results. Despite ongoing short-term quarterly fluctuations and cost pressures, the long-term growth trajectory remains solid. Goldman Sachs maintains a "Buy" rating on FedEx, with a 12-month target price of $390, representing about a 28% upside from Wednesday's closing price of $304.58.

Performance Highlights

The financial report shows that FedEx achieved revenue of $22.9 billion in the third quarter, representing an increase of about 12% compared to $20.4 billion in the same period last year, and surpassing market expectations of $22.42 billion. In terms of profitability, adjusted operating income was $1.2 billion with an adjusted operating margin of 5.3%. Adjusted earnings per share were $3.74, up approximately 28% from $2.93 a year ago, and ahead of market expectations of $3.36.

The company's net income for the quarter was $290 million, down from $650 million in the same period last year. The significant fluctuation in net income was mainly due to one-time items, including losses related to short-term investments, debt extinguishment gains, and certain restructuring costs. It is reported that the company completed the spin-off and listing of FedEx Freight on June 1, 2026, retaining 19.9% equity, and recognized a $1.2 billion book loss on this equity investment for the quarter.

By business segment, FedEx’s US domestic express business saw operating profit growth in the quarter, mainly driven by increased package unit prices and business volume; the international business benefited from growth in international export volume, but was partly offset by rising wages, increased outsourced transportation costs, and changes in global trade policy.

Based on the strong quarterly performance, FedEx raised its calendar year 2026 adjusted EPS guidance from the previous $16.90–$18.10 to $18.00–$18.60. At the same time, it raised revenue growth guidance for 2026 from the previous 11% year-over-year to approximately 12%.

Goldman Sachs Commentary

Goldman Sachs noted that FedEx’s third-quarter adjusted EPS reached $3.74, significantly above its own estimate of $3.18. The earnings beat was mainly attributable to an international segment margin of 3.9%, and EBIT (earnings before interest and taxes) far surpassing expectations. Given that the company has set a long-term margin target of 8% for 2029, this performance is encouraging.

However, despite raising the full-year EPS guidance from $16.90–$18.10 to $18.00–$18.60, Goldman Sachs notes that the US domestic segment margin declined by 20 basis points year-over-year and is expected to decline slightly further in Q4, which may cause some concern. The company cited adverse effects from fuel costs, indicating these should be temporary, but also noted that outsourced transportation costs remain elevated.

FedEx management believes that the company has various means to mitigate the impact of outsourced transportation costs by 2027, so it expects that the domestic business margin for the whole of 2027 will improve year-over-year. However, the market may still be concerned about when margins will begin to rebound and whether the company can actually implement cost alleviation measures.

Nevertheless, Goldman Sachs said it had previously anticipated that, following the spin-off of the freight business and the shift from fiscal to calendar reporting, there could be some noise and volatility in quarterly results (as investors also need to adapt to new seasonal trends). However, Goldman Sachs remains confident that, with volume recovery and the enforcement of core pricing discipline, the profit margin improvement potential for both domestic and international operations will be realized over the next three years.

Goldman Sachs continues to give FedEx a "Buy" rating. The positive rating is supported by the following factors: (1) The company adopts a multi-pronged business strategy and implements distinctive cost and efficiency improvement initiatives, including increasing the share of high-yield B2B operations, selectively developing B2C business, driving cost transformation, and integrating artificial intelligence (AI). (2) Strong capital discipline and robust free cash flow (FCF) conversion capabilities. Notably, capital expenditures as a percentage of revenue have fallen from 7.2% in fiscal 2022 to 4.0% in fiscal 2026. (3) Strong long-term EPS potential, expected to approach $25 by calendar 2029. (4) The recovery in freight demand is expected to reduce fixed cost per shipment and bring earnings leverage through operational scale. (5) Given the upside potential from freight recovery, the company’s own efficiency improvements and cost-saving initiatives, the current valuation remains reasonable.

Goldman Sachs also pointed out that the stock is currently trading at only 14.8 times the bank’s estimate of 2027 calendar year earnings. The firm expects international operations to perform strongly in 2027, and with this backdrop, remains optimistic about the company achieving healthy double-digit EPS growth. However, since domestic margin trends at the end of 2026 are lower than previous expectations, Goldman Sachs has trimmed its 2027 forecast to reflect a slower pace of margin improvement at the beginning of the year. Nonetheless, the firm’s three-year earnings growth trajectory remains intact, and its 2029 EPS forecast has not been revised.