FedEx - Problems At Express Division Weigh On Results

| About: FedEx Corporation (FDX)

Shares of FedEx (FDX) ended the week with losses over 6%. At the beginning of last week the transportation company announced its first quarter results for its fiscal 2013.

First Quarter Results

FedEx reported first quarter revenue of $10.79 billion, up 2.6% on the year. Analysts expected FedEx to report revenue growth of 1.7% to $10.70 billion. Operating earnings rose by 0.7% to $742 million, resulting in operating margin compression of 10 basis points to 6.9%. Net income fell by 1% to $459 million, resulting in a fall in earnings per share by a penny to $1.45. Earnings surpassed FedEx's own estimate of $1.37-$1.43 per share. Two weeks ago, FedEx lowered its original guidance of $1.45-$1.60 per share. Analysts expected FedEx to report earnings of $1.41 per share.

CEO and Chairman Frederick W. Smith commented on the results:

As we announced on September 4, weakness in the global economy constrained revenue growth at FedEx Express during our first quarter and affected our earnings. Meanwhile, our FedEx Ground and FedEx Freight segments performed well, with both improving their year-on-year operating margins. We are taking further actions to reduce costs and adjust our networks to match current and anticipated shipment volumes.

Segmental Information


The main express segment reported a 1% increase in revenue to $6.63 billion. Operating income fell by 28% to $207 million, resulting in operating margin compression of 130 basis points to 3.1%. Profitability came under pressure amidst falling US domestic package volumes. Demand for lower-yielding services and higher employee benefit expenses could not be offset by cost containment activities.


Revenues for the ground segment were up 8% to $2.46 billion. Operating income rose in line, increasing 9% to $445 million. Operating margins improved by 20 basis points to 18.1%. Ground volumes increased by 5% in both business-to-business and home-delivery systems.


The freight segment reported revenue of $1.40 billion, up 5% on the year. Operating income more than doubled from $42 million to $90 million. Operating margins doubled to 6.4%. Profitability was driven by profitable volume growth, higher yields and operational efficiencies.


For the second quarter of its fiscal 2013, FedEx anticipates earnings per diluted share between $1.30 and $1.45. On average, analysts expected FedEx to guide for earnings of $1.61 for the current quarter.

Full-year earnings are expected to come in between $6.20-$6.60 per diluted share. Earlier, FedEx expected full-year earnings to come in between $6.90-$7.40 per share. The guidance assumes the current outlook for fuel prices and does not include the impact of possible cost reduction programs. Analysts expected FedEx to guide for full-year earnings of $6.94 per share.


FedEx ended its first quarter with $2.74 billion in cash and equivalents. The company operates with $2.36 billion in short- and long-term debt, for a net cash position of almost $400 million.

FedEx generated revenue of $42.7 billion for its full year of 2012. The company net earned $2.0 billion, or $6.40 per diluted share. Currently, the market values the firm at $26.5 billion, or $26 billion for the operating assets. The market values the firm at 0.6 times annual revenue and 13 times 2013's guided earnings.

The valuation compares to a revenue multiple of 1.3 times for its larger competitor UPS (UPS). UPS trades at 18 times trailing annual earnings.

Currently, FedEx pays a quarterly dividend of $0.14 per share, for an annual dividend yield of 0.7%.

Investment Thesis

Year to date, shares of FedEx are trading unchanged. Shares advanced in February to highs of $97 per share, but fell back to $85 at the moment.

Over the past five years, shares of FedEx have lost roughly 20% of their value. Shares traded as low as $40 in the beginning of 2009 and rose to almost $100 in 2011. Despite falling share prices, FedEx has boosted annual revenue from $35.5 billion in 2009 to $42.7 billion in 2012. Net income rose from $98 million in 2009 to $2.0 billion in 2012. Earnings per share rose from $0.31 to $6.40 per diluted share. Dividends rose slightly from $0.44 per annum to $0.56 per share, at the moment.

Investors have grown a bit impatient with FedEx. While revenue and earnings have been on the rise for many successive years, investors hoped for more. The profit warning in September highlights the softening of the global economy as more firms have pointed out. Some quarters, it is high oil prices impacting results, other times it is lack of demand.

While FedEx trades at a discount to competitor UPS, I remain on the sidelines. The valuation on a stand-alone basis is not appealing enough to justify a long position. Unless prospects for the economy and FedEx improve, or the company hikes its dividend, I will not pick up shares anytime soon.

Disclosure: I 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.