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FedEx (FDX) Down 6.3% Since Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for FedEx Corporation FDX. Shares have lost about 6.3% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Third quarter earnings

FedEx Corporation’s third-quarter fiscal 2017 (ended Feb 28, 2017) earnings per share (on an adjusted basis) of $2.35 fell well short of the Zacks Consensus Estimate of $2.63. Moreover, earnings declined 6.4% on a year-over-year basis. Quarterly revenues climbed 18.1% year over year to $14,997 million, surpassing the Zacks Consensus Estimate of $14,956.4 million.

While, operating income (on an adjusted basis) declined 3.4% year over year to $1.12 billion in the quarter, operating margin declined 170 basis points to 7.5% during the quarter.

Segmental Performance

Quarterly revenues at FedEx Express inched up 3% to $6.78 billion driven by increased base rates and higher package volume. While, operating income declined 1.5% to $586 million in the reported quarter, segmental operating margin declined to 8.6%. In addition, operating results were negatively impacted by higher fuel costs and the presence of one less operating day.

Revenues at the TNT Express segment came in at $1.79 billion during the quarter. Operating margin, on an adjusted basis, was 2.2%.

Moreover, FedEx Ground revenues increased 6% year over year to $4.69 billion in the fiscal third quarter. The rise was due to volume expansion and higher base rates aided the segmental performance during the quarter. While, operating income came in at $515 million, down 8%, operating margin depreciated 160 bps to 11%. Increased rent coupled with higher fuel costs and the presence of one less operating day in the quarter contributed to the lackluster segmental operating results.

FedEx Freight revenues grew 3% year over year to $1.49 billion, aided by higher base rates and fuel surcharges. Average daily shipments were flat on a year-over-year basis. The segment’s operating income decreased 27% to $41 million. Operating margin was 2.7%, down 120 bps. Segmental operating results were hurt by higher costs.

Fiscal 2017 View

The company still expects earnings in the band of $11.85–$12.35 per share, excluding TNT Express-related integration expenses and other costs. Including the impact of the acquisition of TNT Express, the company expects fiscal 2017 earnings in the band of $10.80 to $11.30 (old guidance: $10.95–$11.45 per share). The guidance assumes moderate economic growth.

Capital expenses, including TNT Express buyout, are now projected at $5.3 billion (old guidance: 5.6 billion).  The outlook was trimmed due to lower anticipated investments at its ground unit.

The company mentioned that the TNT Express integration process is on track. Additionally, it said that instead of being reported separately from fiscal 2018, its TNT Express segment will be included in its Express unit. Consequently, FedEx expects an operating income improvement at its Express unit in the band of $1.2 billion to $1.5 billion in fiscal 2020 compared with fiscal 2017.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter compared to one lower.

FedEx Corporation Price and Consensus

 

FedEx Corporation Price and Consensus | FedEx Corporation Quote

VGM Scores

At this time, FedEx's stock has a subpar Growth Score of 'D', however its Momentum is doing a bit better with a 'C'. Charting a somewhat similar path, the stock was allocated a grade of 'B' on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregte VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for value investors than momentum investors.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising.  Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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