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FedEx (FDX) Misses on Q3 Earnings, Strong Q4 Anticipated

Zacks Equity Research

FedEx Corporation’s FDX third-quarter fiscal 2017 (ended Feb 28, 2017) earnings per share (on an adjusted basis) of $2.35 fell short of the Zacks Consensus Estimate of $2.63. Moreover, earnings declined 6.4% on a year-over-year basis. The bottom line was hurt primarily due to significantly higher fuel costs. Elevated expenses pertaining to package deliveries in the recent holiday season also contributed to the year-over-year decline in earnings.

 

Quarterly revenues climbed 18.1% year over year to $14,997 million, surpassing the Zacks Consensus Estimate of $14,956.4 million. Strong sales at the company’s Ground, Express and Freight divisions boosted the top line in the fiscal third quarter. The top line was aided by higher rates and the increase in packages shipped.

Notably, this is the third full quarter after the acquisition of TNT Express, which was completed in May 2016. Inclusion of the results of TNT Express also aided the top line.

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. Results were hurt primarily by fuel-related headwinds. Additionally, the presence of one less operating day in the quarter coupled with increased investments at its Ground division led to the below-par operating results.

The company hired more than 50,000 seasonal workers to meet the recent holiday season rush. However, there was “unused capacity” during the season, contributing to the disappointing bottom-line performance in the quarter. Further, in view of the rapid e-commerce growth, FedEx invested heavily to meet the surge in demand during the holiday season, similar to its rival United Parcel Service UPS.

FedEx stated on its conference call that it was not too perturbed about Amazon.com, Inc.’s AMZN performance in the package delivery market, as more than 85% of its operations are not related to e-commerce.

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 decreased 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 commercial volume expansion and higher base rates. While operating income was down 8% to $515 million, 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.

Price Performance

FedEx's stock has been struggling since the fiscal second quarter earnings miss, contracting 3.58% in the last three months. However, it has performed better than the Zacks categorized Transportation-Air Freight industry, which lost 4.95%.

 

The earnings miss in the fiscal third quarter serves as a further dampener for the stock.

Fiscal 2017 View

After two successive earnings misses, the company expects to perform strongly in the fiscal fourth quarter. The company expects margin of more than 15% at its Ground unit in the fiscal fourth quarter, thereby driving the strong results predicted for the final quarter of fiscal 2017.

Due to this expectation, the company still anticipates earnings in the band of $11.85–$12.35 per share, excluding TNT Express-related integration expenses and other costs. The Zacks Consensus Estimate for fiscal 2017 currently stands at $11.99 per share.

Including the impact of the acquisition of TNT Express, the company expects fiscal 2017 earnings in the band of $10.80–$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 results will be included in its Express unit. Consequently, FedEx expects an operating income improvement at its Express unit in the band of $1.2–$1.5 billion in fiscal 2020 compared with fiscal 2017.

FedEx Corporation Price, Consensus and EPS Surprise

 

FedEx Corporation Price, Consensus and EPS Surprise | FedEx Corporation Quote

Zacks Rank & a Key Pick

FedEx currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the broader transportation space is GOL Linhas GOL, sporting a Zacks Rank #1 (Strong Buy). Shares of the company have gained 20.7% in the last six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

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