FedEx: Expectation Versus Reality

| About: FedEx Corporation (FDX)

Summary

Q4 earnings are out and I discuss results.

Reality surpassed expectations but there was concern over guidance which I see as unnecessary.

Wait for the pullback.

FedEx Corp. (NYSE:FDX) has just pulled back. When I first opined on the name I thought it was a strong company that was a touch too expensive. I also thought it should raise its dividend which I am pleased report it recently raised 60%. Given that it has been some time since I checked in on the name I decided to take a look at the company's performance.

The company has just reported a decent quarter. So how good are we talking? Well, revenue was $13 billion, rising 7.3% and beating estimates by $220 million. On a GAAP basis, reported earnings were a loss of $0.26 for the fourth quarter compared to a loss of $3.26 $per diluted share last year, so that is strong improvement. Of course we need to consider adjustments when comparing year-over-year and adjusted operating income rose 23% year-over-year. Adjusted earnings were $3.30 per share compared to adjusted earnings of $2.66 per share a year ago. This also beat expectations by $0.02.

Part of the reason the company delivered was due to buybacks which I will discuss but the company has been watching expenses and has seen continued positive impacts from these profit improvement program initiatives. Let us not forget oil prices are a huge expense and the net impact of fuel was mitigated compared to last year helping to improve results.

Segment specific results were also impressive for the most part. The Freight segment reported revenue of $1.61 billion, up 2% from last year's $1.57 billion. Operating income was $137 million, flat from the $137 million a year ago and operating margin was pressured, coming in at 8.5%, down from 8.7% last year. Revenue was up thanks to higher average daily shipments.

Turning to the Ground segment revenues increased markedly, coming in at $4.29 billion, up 20% from last year's $3.57 billion. Operating income was up as well to $656 million, from $603 million a year ago. Interestingly margins were pressured, as one might guess from the big rise in revenues but moderate rise in operating income. Operating margin was 15.3%, down from 16.9% the previous year. Revenues did rise on higher volume and pricing but operating results were negatively impacted by higher costs.

The Express segment was relatively flat year-over-year on a revenue basis, but operating income and margins were stronger than last year. Revenue was $6.72 billion, flat from last year's $6.70 billion. However thanks to strong expense management as well as fuel and currency exchange positive impacts, operating income rose 27% to $757 million from $598 million a year ago. Further, operating margin jumped to 11.3%, up from 8.4% last year.

These results are strong. Thanks to the buyback continued benefits to earnings per share should continue, as over the year the company bought back 18.2 million shares of FedEx common stock. The more shares repurchased the higher earnings will be. Looking ahead to 2017 FedEx expects moderate economic growth but hinted a precise estimate of sales and earnings is tough. That said the company set its adjusted earnings forecast to $11.75 to $12.25 per share with capital spending of $5.1 billion. This is a guidance in my opinion though it was considered light by some and the stock sold off. With a buyback and higher dividend, as well as continued strong growth, I like the name long-term. Still I would wait for a pullback under $150.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time-sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.