Shipping goliath FedEx (FDX) announced better-than-anticipated fiscal first quarter results. Revenue rose 2% year-over-year to $11 billion, slightly above consensus expectations. Earnings per share increased 5.5% year-over-year to $1.53 per share, also slightly above consensus estimates. Free cash flow was decent at $357 million, equal to 3.2% of total revenue.
Express revenue was roughly flat year-over-year at $6.61 billion, but segment operating income jumped 14% year-over-year to $236 million as the firm benefitted from 50 basis points of operating margin expansion. Management cited lower pension expenses and lower maintenance costs as the main drivers of earnings expansion in the face of flat top-line performance. This ends two consecutive quarters of top-line growth, but we remain very impressed with the pace of profitability expansion.
FedEx Ground continues to be the company's growth driver, as revenue surged 11% year-over-year to $2.73 billion (as average daily package volume jumped 11%). Though we think some revenue is being siphoned from the Express unit, we believe Ground shipping is a secular growth story that is advantageously exposed to the continued preference for e-commerce. Segment operating income was just 5% higher year-over-year at $468 million driving operating margins 100 basis points lower than the year-ago period at 17.1%. Management blamed the decline on rising fuel costs, as well as capital spending designed to increase the size of the firm's shipping network. CFO Alan Graf added that these initiatives are "very high ROIC" investments, which we view as an encouraging statement about cash flow generation in coming years.
Often an afterthought, FedEx Freight generated revenue of $1.42 billion, 2% higher than the same period in the year-prior period. Operating margins were flat year-over-year at 6.4%, so operating income was just $1 million higher at $91 million.
Looking ahead, management kept its previous guidance for fiscal year 2014 in place, though it lowered its GDP outlook for the US to 2.1% (was 2.3%) and the world to 2.6% (was 2.7%). Earnings-per-share is still expected to expand 7-13% on a year-over-year basis, while the firm spends $4 billion on capital investment. We think there is modest upside to the earnings forecast if US GDP growth accelerates and/or pricing initiatives don't lead to significant customer defections (FedEx Express will increase shipping rates 3.9% effective January 2014).
FedEx's fiscal first quarter certainly wasn't marked by strong top-line growth, but Express segment operating margin expansion and continued secular growth in Ground helped the firm achieve positive results. Though share performance has been strong (up nearly 29% year-to-date), we think shares of the shipping giant are currently fairly valued. For a highly cyclical business like FedEx, we demand a large margin of safety, and we do not believe the current valuation justifies a position in the portfolio of our Best Ideas Newsletter.