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FedEx Continues to Struggle With Margins

- By Sangara Narayanan

FedEx Corp. (FDX), the second-largest parcel transport and logistics player in the United States, reported third-quarter earnings on Tuesday that missed expectations by a wide margin. The company reported adjusted earnings per share of $2.35 while the market expectation was for $2.62.

A rosy outlook for operating margin improvement saved their day however. In its earnings press release, FedEx noted:

"The company is targeting operating income improvement at the FedEx Express group of $1.2 billion to $1.5 billion in fiscal 2020 versus fiscal 2017, assuming moderate economic growth and current accounting and tax rules. The operating income target includes expected TNT Express synergies as well as base business and other operational improvements across the global FedEx Express network."

FedEx Ground, which handles a bulk of e-commerce traffic, has been under margin pressure for quite some time. The margin for the ground segment was 11% during the third quarter, 2.6% more than what it managed last year but only 0.5% more than the second quarter. FedEx expects the segment's margin to increase to 15% during the fourth quarter due to increased cost efficiency.

Both United Parcel Service Inc. (UPS) and FedEx reported worse-than-expected quarterly results and hope to change their fortunes in subsequent quarters. FedEx revenues increased 18.5% to $15 billion during the third quarter, but the jump was mainly due to the addition of TNT Express revenues. Now all expectations for FedEx will be toward how much it will improve operating margins, which have always lagged behind UPS.

Although there has been much speculation about Amazon (AMZN) entering the logistics game, the segment is way too capital-intensive for the retailer to handle, not to mention being fraught with many risks. Even if Amazon enters the race, UPS and FedEx will be the two companies shouldering the massive responsibility of moving goods ordered online. With e-commerce shipments expected to continue growing over the next several years, UPS and FedEx have a long and secure runway for growth. Both companies offer a lot of stability due to the nature of their business, and you can practically hold them forever.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus.