International shipping giant FedEx (FDX) reported weak third quarter results and a light outlook as its customers have flocked towards lower cost shipping options. Revenue grew 4% year-over-year to $11 billion, slightly above consensus expectations. Earnings fell 21% year-over-year on a non-GAAP basis to $1.13 per share, as operating margins declined 330 basis points to 5.4%.
On a segment basis, FedEx Express revenue grew just 2% year-over-year to $6.7 billion, with volumes and pricing up 1%, respectively in the US. International Economy shipping volumes grew 12%, while International Priority volumes increased just 2%. As a result, average export revenue per package fell 3%, leading segment operating margins down 350 basis points to 1.8%. CEO Fred Smith noted that the "door-to-door" international market is still performing well, but blamed the air cargo market for the lackluster results, saying:
"It is the air cargo market, and the air cargo market is, as I mentioned a moment ago, has been adversely affected by lower economic growth around the world caused by the policy choices that are now reflected in the European situation, relatively low growth in the United States and China situation. So the International Express business is still growing, the door-to-door part of the business. And these aren't new things. They just perhaps have accelerated a little bit because of this overcapacity situation."
We think part of the problem is that companies have adjusted to demand slack by dragging out shipping cycles - if something isn't moving off the sales floor (or website), then there's no incentive to quickly stock inventory. We could see this business accelerate if macroeconomic conditions improve, but we also see a scenario in which leaner organizations simply accept longer shipping cycles to reduce coasts. Such a condition would be bearish for FedEx.
FedEx Ground performed significantly better, with revenue surging 11% during the third quarter to $2.8 billion, though operating margins fell 180 basis points to 17%. Average daily volume grew 10%, while average revenue per package increased 1%. Ground shipping could benefit from two obvious tailwinds; the first being increased online selling, and the other being the demise of a subsidized competitor in the US Postal Service. These trends will benefit both FedEx and competitor UPS (UPS). Management described the trend well when talking about the holiday season, stating:
"So what happened in the holiday? The holiday was a great season for us. All of our large customers had exceptional demand. There was clearly demand from the online world that probably had not been experienced historically. That was good for them, and that was good for us."
Freight, easily FedEx's smallest segment, flat-lined with $1.2 billion and earnings of $4 million versus a loss of $1 million during the year ago period.
Going forward, management hopes to realize some cost savings from fleet investments, but it will take some economic growth upside to help the firm post stronger earnings growth. FedEx will be reducing its Trans-Pacific capacity beginning April 1, which could help stabilize pricing.
FedEx's outlook for fiscal year 2013 was certainly not good, as the firm took a hatchet to its previous guidance of $6.20-$6.60 per share in earnings, as it now anticipates earnings $6.00-$6.20 for the full-year. This forecast excludes the impact of corporate reorganization costs, and is a far cry from the original guidance of $6.90-$7.40 per share given in June of 2012. At this time, we continue to believe shares of FedEx are fairly valued, and we have no interest in adding them to the portfolio of our Best Ideas Newsletter.