FedEx (FDX; Baa2/BBB; S) 1Q25 (3m to August) Results

Vol for FedEx equities is normal; it climbed +17% on the last qtr earnings and is now reversing -11% in pre-market. Weak results and seems to be driven by high operating leverage in the core express business which faced LSD volume declines and a trading down in services in the US. We don't expect rating pressure. No maturities this year matched by no issuance thus far and only maturity next year is the €500m Aug line. Curve has moved +6-8bps today, no firm view from us, but rotation out of DHL/UPS looks attractive. Note the uncertainty around the future of Freight business (30% of EBIT) - and any cash proceeds.

• 3m to August saw revenue at $21.6b (flat yoy), EBIT at $1.2b (-24%yoy) at a margin o 5.6% (-170bps). It says results reflect a "challenging demand environment" particularly in US domestic packages.
• Margin issue was in Fed Express (not freight) where its blaming fewer operating days, lower priority package volumes (consumers trading down), increased wages and increased transport rates.
• Despite above the volume falls do not look that severe. JP equity analyst commenting "a reminder that the legacy Express business carries significant operating leverage to unexpected drops in demand" - seems to be the case.
• FY25 guidance now LSD revenue growth (prev. LSD to MSD) and bakes in a demand recovery through the remaining 9-months/FY (moderate improvement in industrial production). Still committed to $2.5b in buybacks and total $3.8b including dividends (~unch yoy). Capex to total $5.2b (again unch yoy).
• We mentioned this in last quarter earnings as well but the Freight business is being evaluated within the portfolio; 11% of group and 32% of EBIT this qtr. We see light protections in the form of asset sale restrictions in bond doc's (when assets exceed 10% of group assets) requiring the normal; proceeds To debt paydowns or broad-based capex. For those eyeing how much it would fetch, Freight runs $1.8-$1.9b/yr in EBIT. We see leverage (including leases) at net 3x/gross 3.6x and within recent years ranges.