FedEx: Crash And Burn

| About: FedEx Corporation (FDX)


FedEx ran into an unexpected hiccup in its most recent quarter.

I discuss performance and elaborate on what happened.

Year of TNT Express integration costs may weigh.

When FedEx Corp. (NYSE:FDX) pulled back heavily in June I noted this as a buying opportunity. It is important to note that 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, and of course it did recently raise the payout 60%. The company had been firing on all cylinders, but today some are saying this name is about to crash and burn. That it should be sold and avoided. Being a realist, I think it is appropriate to say FedEx ran into an unexpected hiccup.

What do I mean? Well the company has just reported another quarter of earning but this time it had issues. It wasn't all doom and gloom as the action suggested, as did the headlines. So how weak was it? Well, revenue was $14.9 billion, rising 19.2% year-over-year and meeting estimates. That is a positive. On a GAAP basis, reported earnings were $2.59 for the first quarter compared to $2.44 per diluted share last year, so that is strong improvement. Of course we need to consider adjustments when comparing year-over-year and as such adjusted operating income rose slight year-over-year to $1.23 billion. Adjusted earnings were $2.80 per share, rising from $2.58 last year. However, this missed estimates by $0.10.

Part of the reason the company saw a large increase on a per-share basis was due to buybacks, which I will discuss, but the company has also 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. That said, operating margin was pressured and came in at 8.3%, down from 9.6% last year.

Segment-specific results were also impressive for the most part. The Freight segment reported revenue of $1.60 billion, up 3% from last year's $1.55 billion. However, due to lower average weight per packages and some I.T. costs, operating income was pressured. It fell 13% to $88 million, down from the $101 million a year ago. Of course, operating margin was also pressured, coming in at 5.5%, down from the from the 6.5% last year. These results weighed on overall performance.

Turning to the Ground segment, revenues increased markedly, coming in at $4.42 billion, up 9% from last year's $4.05 billion. Thanks to higher rent costs, transportation rates and network expansion, expenses rose pressuring operating income. Operating income fell 12% to $465 million, from $526 million a year ago. Margins of course took a hit as one might guess from the drop in operating income. Operating margin was 10.5%, down from 14.0% the previous year.

The Express segment was up year-over-year on a revenue, operating income and margins basis. Revenue was $6.74 billion, up from last year's $6.59 billion. However thanks to strong expense management as well as fuel and currency exchange positive impacts, operating income rose to $654 million from $622 million a year ago. Further, operating margin jumped to 9.7%, up from 9.4% last year. I will also point out that the TNT Express segment brought in revenues of $1.9 billion and operating income of $90 million.

The rise in expenses really weighed this quarter. In terms of deliveries, for the most part I felt the quarter was strong based on the results. Revenues were up sharply as a whole. But the expenses led to a huge hit to margins and as such weighed on earnings, explaining the miss on estimates. These results are strong. It is important to note that the company expects to incur significant expenses over the next few years in connection with our integration of TNT Express and the Outlook restructuring program. 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 $11.85 to $12.35 per share with capital spending of $5.1 billion (this is a $0.10 hike to guidance on both ends). Bottom line, don't let one quarter scare you. If you have profits, by all means take some. But I would stick by the name through the holiday shopping season.

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.

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