On Tuesday, global package shipper FedEx (FDX) reported strong results for its 2012 fiscal year fourth quarter. Net of a non-cash impairment charge related to the retirement of several aircraft, earnings per share for the fourth quarter grew to $1.99 from $1.75 (compared to a consensus estimate of $1.92). Net of this impairment, the firm's operating margin increased 60 basis points to 9%, on revenues of $11 billion (up 4% on a year-over-year basis). At current levels, we think FedEx is fairly valued on the basis of our DCF process (click here for our DCF valuation model template). Plus, the firm scores a 4 on our Valuentum Buying Index, indicating we aren't too excited about allocating new capital to the company at this time. Please click here to download a presentation on how to interpret our Valuentum Buying Index rating.
The FedEx Ground segment experienced another strong quarter, with revenue advancing 9% to $2.48 billion due to increased yield and volume. Daily package volume for the segment grew 3% compared to the same period a year ago. FedEx Freight, a lower margin segment, saw 7% revenue growth and a near doubling of operating income thanks to strong yield and volume growth, as well as increased operational efficiencies. FedEx Express, the company's primary source of revenue, saw its revenue grow 3%, but that was offset by lower profitability, which sent operating income down 3% in the segment.
According to management, the lower profitability in FedEx Express is due in part to an aircraft impairment charge and a larger-than-usual lag between fuel price increases and surcharges. Surprisingly, the firm hasn't seen much weakness in Europe, where it continues to make strategic acquisitions and witness FedEx Express outperform quarter after quarter. Rather, weakness has actually come from Asia, where changes in how tech companies have handled launches have negatively affected business. Management also noted a strong trend away from traditional air freight to ocean freight.
Going forward, the company guided to earnings per share for fiscal year 2013 of $6.90-$7.40 (versus consensus expectations of $7.39 per share), which assumes US GDP growth of 2.2% and global GDP growth of 2.6% during fiscal year 2013. Though its earnings guidance may seem low relative to consensus, management did not account for cost-savings initiatives that will take place during the year. Specifically, the firm will see savings from more fuel-efficient aircraft and may see better pricing as industry-wide supply may fall. We view these potential developments together as a significant positive for operating margins. Though management delayed some Boeing 777 (BA) purchases in fiscal year 2012 as a result of acquiring 767s on favorable terms, the firm's capital expenditure spending should remain at the same level during fiscal year 2013.
We provide management's comments during the conference call about its view on the domestic and global economies, respectively:
"FedEx's economic outlook calls for moderate growth to continue in the U.S. and global economy. Our forecast calls for calendar year '12 U.S. GDP growth to be 2.2% and industrial production growth to be 4.3%. For calendar year '13, we expect GDP growth of 2.4%, and our outlook is largely in line with the consensus economic forecast. We expect calendar year '12 world GDP forecast to be 2.4%. It's important to point out that successful management of the debt crisis in Europe and the avoidance of significant tax increases next year in the U.S. are important assumptions in our forecast."