As predicted by Qineqt, FedEx (FDX) fell 3% after the company slashed its outlook for the year. However, the company managed to top EPS and revenue estimates. The following table shows the summary of the earnings release.
EPS estimates were slashed just a fortnight before the release, when FDX announced that it now expected EPS to be in a range of $1.37-$1.45, as compared to the earlier forecast of $1.45-$1.6. The slash came after its arch rival United Parcel Services (UPS) lowered its 2012 earnings forecast and reduced its operating capacity in Asia in July, due to the global economic uncertainty.
Similarly, the market had anticipated that the company's productivity enhancements plans would improve margins as well. However, after the EPS forecast was slashed, many gave up on that idea. The same was reflected in the release, as the margins were down 100bps YoY to 6.9%. However, what should not be forgotten is that margins did improve within the segments that have been discussed below.
The continued improvement at FedEx Ground and Freight was offset by the Express division.
FDX estimates earnings to be $1.3-$1.45 in the second quarter and $6.2-$6.60 for 2013. The earlier outlook stated an estimate of $6.9-$7.4.
Following are the segment-wise revenues made by FDX:
The following table shows the revenues, operating income and margin improvements in the first quarter of 2013.
The following table shows the results in the previous quarter.
After comparing both tables, it can be concluded that both revenue growth and operating income growth rates are falling over the passage of time. Companies like FDX are bellwethers of the economy, and therefore falling growth rates for these companies reflect the falling growth rate of the economy.
The decline in margins for Express is alarming. It shows that much of the voluntary buyouts were not availed. Also, the decline came because the slowdown in the economy had shifted consumer focus towards FDX's non-premium services, and the company has been unable to adjust the operating capacity of Express accordingly. This is worrisome for the company, as Express forms the largest division of the company, and accounts for over 60% of FDX's revenues. Another reason why margins declined was because the trend is shifting towards less-profitable international services.
E-commerce has been the key driver for this segment, which is why average daily volume of SmartPost rose by 18%. The overall average daily volume increased by 5% due to a rise in business-to-business transactions and Home Delivery Services.
FedEx Freight Segment
The segment's margins doubled due to continued improvement in operational efficiencies. Freight is the most-growing segment of the company, since the dynamics of LTL are favorable on a macro level. By this, we mean that pricing and growth are expected to remain stable in the future. It is expected to grow by 2.4% this year. Also, in the Transportation Conference held in New York last week, a majority of investors polled that after railroads and logistics, LTL is going to be the best performer in the Transportation Industry in the near future.
2013 Rate Increases
The Express division is expected to raise the rates by an average of 3.9% for domestic, import and export services early next year. This has been planned primarily keeping in view the rise in fuel charges in the future. The pricing changes for Ground will be announced later this year. The Freight division has already undergone an increase in charges of 6.9% in July this year.
FDX is expected to announce its restructuring plan, and the resulting financial impact on October 9 and 10 this year in a Transportation Conference. Analysts, on average, think that the expected savings from the plan will be around $480 million. Calculations show that $275 million in savings will add a 100 points to the margin. Therefore, total savings will bring an improvement of 175bps in the margin. It is interesting to note that 15% of the analysts were of the point of view that the savings will be around $650 million, which means a margin improvement of 236bps.
The future does not seem to be clear for the company. Its main business, Express, has been declining. The decline in Express is cyclical rather than secular. People with lesser money in their pockets prefer cheap and slower modes of transportation, which is why FedEx Ground is improving and Express is getting a hit. Stocks like FDX and UPS are pure plays on macroeconomic conditions. FDX sees a global GDP growth of 2.7% in 2013, reduced from the previous estimate of 3%. For the U.S., it expects the economy to grow at 1.9%, rather than the earlier estimate of 2.4%.
Nevertheless, the company has a strong balance sheet. The cash flows from operations are positive. The company has no debt issue. It is trading at a multiple of 10x. However, we firmly believe that there will be a better entry point for investor to buy the stock. Therefore, it is recommended that investors short the stock in the short run unless a powerful catalyst is in sight. The October meeting on cost cutting and efficiency program will be an important catalyst for the stock.