FedEx Corporation (FDX) – the leader in global express delivery services – reported first quarter fiscal 2014 results.
Quarterly adjusted earnings of $1.53 per share surpassed the Zacks Consensus Estimate of $1.49 and improved from the year-ago adjusted earnings of $1.45. Despite the challenges in the macro economy, the company delivered strong earnings on the back of higher revenues at the Ground and Freight segments coupled with cost control efforts at the Express segment.
Total revenue for the first quarter was $11.0 billion, 2% higher than $10.8 billion in the first quarter of fiscal 2013 and in line with the Zacks Consensus Estimate.
Operating income increased 7% year over year to $795 million, resulting in an operating margin of 7.2%, up 30 basis points. The growth was driven by significant margin expansion at FedEx Express. Total operating expense crept up 2% year over year to $10.2 billion due to higher depreciation and amortization expenses along with steeper purchased transportation costs.
Quarterly revenues at FedEx Express were $6.61 billion, down from $6.63 billion in the year-ago quarter. The revenue decline was due to lower fuel surcharge revenues and one less operating day than the year-ago quarter.
Operating income was up 14% year over year at $236.0 million in the first quarter, resulting in an operating margin of 3.6%, up 50 bps from 3.1% in the year-ago quarter. The improvement was aided by perked-up business in the U.S. market as well as lower pension expenses.
The FedEx International Priority average daily package volume remained flat year over year and revenue per package (yield) decreased 3% due to the unfavorable impact of lower rates, fuel surcharges and increased appetite for lower yielding international services.
FedEx Ground revenues increased 11% year over year to $2.73 billion in the first quarter attributable to volume growth and higher revenue per package. Operating income was up 5% year over year at $468 million but operating margin decreased 100 bps to 17.1% owing to the unfavorable impact of fuel.
FedEx Ground average daily package volume expanded 11% year over year driven by growth in FedEx Home Delivery services and commercial business. Revenue per package inched up 1%. FedEx SmartPost average daily volume expanded 26% and revenue per package decreased 5% because of higher postal rates and lower fuel surcharges, which dampened the positive impact of rate increases.
FedEx Freight revenues were up 2% year over year at $1.42 billion in the first quarter, reflecting a rise of 1% in LTL (less-than-truckload) average daily shipment. Yield was also up 1% year over year. The segment recorded operating income of $91 million, reflecting an increase of 1% year over year. Operating margin was 6.4%, unchanged from the year-ago quarter.
FedEx Services revenues fell 4% year over year to $375.0 million in the first quarter.
FedEx exited the first quarter of fiscal 2014 with cash and cash equivalents of $5.10 billion compared with $2.74 billion at the end of first quarter fiscal 2013. Long-term debt was $2.7 billion, unchanged from the fiscal 2013 level. Capital expenditure amounted to $572 million compared with $972 million at the end of the year-ago quarter.
For fiscal 2014, FedEx maintains earnings per share growth projection at 7% to 13%. The company’s capital expenditure guidance remains unchanged from the previously estimated $4 billion.
FedEx provided rate hikes for 2014, which includes 3.9% hike in shipping rates at FedEx Express for U.S. export and import services, with effect from Jan 6, 2014. The company stated that it will provide information on rate hikes at FedEx Ground and FedEx SmartPost later this year.
We expect FedEx to register earnings momentum and enjoy growth from its long-term expansion opportunities. The company is concentrating on network realignment to match the current demand level and improve its performance.
FedEx also aims to spread its services across the U.S., Canada and Mexico and capitalize on potential business opportunities in the NAFTA (North American Free Trade agreement) market for a competitive advantage over the likes of United Parcel Service, Inc. (UPS), Expeditors International of Washington Inc. (EXPD) and Radiant Logistics, Inc. (RLGT).
Nevertheless, the effects of a sluggish economic environment have clouded the near-term outlook of the company. Further, competitive threats, legal hassles, unionized workforces and pension headwinds could limit the upside potential of the stock.
Currently, FedEx retains a Zacks Rank #3 (Hold).