FedEx Corporation (FDX), which is best known for the transportation services it offers in the US, released its Q2 earnings report recently. The report showed that the company had missed the analysts' consensus estimates of revenue and EPS growth, apparently due to the softening growth of its core services like FedEx Express. However, the varying levels of demand in the transportation industry has to be factored into the equation. Further, the company has significantly improved its operating margins and raised its growth guidance for 2014. Together these point to a far brighter picture of FedEx going forward than may be evident from the earnings report alone.
The bad news in Q2 Earnings Report
The Q2 earnings report of the second largest transportation services company in the US revealed that the company's EPS stood at $1.57, up 13% from a year ago. However it was below the consensus of $1.64, thus continuing the deceleration shown in Q1. Further, the 13% rise itself appears inflated, since last year's shipping volumes had suffered due to Hurricane Sandy and the EPS this year was helped by the repurchase of 10 million shares by FedEx.
FedEx's quarterly revenue rose 3% to $11.4 billion, marginally below the consensus of $11.44 billion. This can be attributed to the decline in growth of daily volume at FedEx Ground - it was 10-11% in the previous two quarters as compared to 8% this fiscal quarter. In addition, the revenue from FedEx Express showed a slight fall as well.
Factors to be counted in
The above statistics do not factor in the fact that while the last Cyber Monday fell in November, this year it was in December. The fiscal quarter ended in the middle of the Thanksgiving weekend, which is vital for any transportation business. Hence, the fall in revenue and volume can partly be blamed on an inopportune calendar.
On the flipside, these will be counted in the earnings report for the next quarter, and should help boost the figures for holiday season sales. It would not be surprising if the next quarter showed a significant rise in FedEx's fortunes. Keeping this in mind, it is not surprising that the company has raised its full year EPS growth forecast from 8% to 14% from the earlier 7% to 14%.
Structural improvements, raised growth guidance
FedEx has remained committed to raising the operating margin to 10%, from the 6.3% it was previously. The cost cutting measures it undertook in this regard have led to the rise of operating margin to 7.3% in Q2, up from 6.5% in the same quarter a year back. Analysts at Deutsche Bank firmly believe that the company will be able to achieve the target operating margin:
"We expect that FDX should begin to realize the benefits of its workforce reductions and various profit improvement initiatives at Express during CY2014."
The investor's choice
As the above analysis shows, FedEx's less than exciting Q2 earnings report does not fully reflect upon its sales. A higher than expected Q3 growth number will contribute to better annual growth than current targets. Added to this are the cost-cutting measures of the company, which will help it improve profitability in the long run. Together, these indicate that the company will continue to grow at a good pace. Thus, it would be advisable for those already having FedEx in their portfolio to "hold" the stock for now, while those who have not yet purchased the company's stock may be advised to buy into FedEx.