FedEx Results Show Improvement But Restructuring Will Hurt Profitability

+1.44%
Upside
290
Market
294
Trefis
FDX: FedEx logo
FDX
FedEx

FedEx Corporation (NYSE:FDX) announced its fourth quarter and full year earnings that were negatively impacted by the high restructuring costs. FedEx incurred a restructuring expense of $496 million in the fourth quarter alone as the company continued to reduce its fleet size and lower the employee head count in order to adapt to the changing transportation dynamics.

Globally, there has been a shift for deliveries from the faster and the more expensive air express segment to the slower and the cheaper ground/sea transportation. Although FedEx has historically had a stronger presence in the air express segment, shifting business dynamics mean that the company is having to adjust to the changing external environment.

Total revenues in the fourth quarter rose 3.6% to $11.4 billion. The company’s net income dropped to $303 million vs $550 million a year ago. However, after adjusting for special items, it grew to $679 million or $2.13 per share. For the full year, the adjusted profit stood at $6.23 a share. FedEx offered a grim outlook as it expects a profit of only $7 per share for the next fiscal. The market had anticipated the figure to be about $7.30. Profitability will be hurt in the near term due to the ongoing restructuring and capacity reductions. [1]

Relevant Articles
  1. Should You Pick FedEx Stock At $300 After Q3 Earnings Beat?
  2. What To Expect From FedEx’s Q3 After 20% Gains In A Year?
  3. Up 30% In A Year Is FedEx Stock A Better Pick Over UPS?
  4. With 20% Gains In A Month Is Target A Better Pick Over FedEx Stock?
  5. Will FedEx Stock Rebound To Its Pre-Inflation Shock Level of Over $300?
  6. Which Stock Is A Better Pick For The Next Three Years – FedEx Or UNH?

See Our Complete Analysis of FedEx

FedEx Ground Consolidates

FedEx Ground’s revenues jumped 12% to $2.78 billion, helped by a 10% volume gain in the traditional ground services and a 25% volume surge in the Smartpost services. [1] FedEx Ground offers small-package ground delivery services and low-cost, day-certain service in the U.S. and Canada. It also includes the Smartpost service that uses a hybrid delivery mechanism leveraging the delivery networks of U.S. Postal Service or Canada Post Corporation for final delivery.

With growing expectations of free shipping of goods purchased through the fast-growing electronic market, e-retailers are increasingly adopting the low-cost “hybrid” alternatives like the Smartpost offered by FedEx, to cut down on shipment costs. We estimate that FedEx’s ground operations account for more than three-fourth of the company’s valuation.

Downward Pressure On Yields

Revenues for the Express division grew 3% to $6.98 billion while the adjusted operating margins rose 50 basis points to 6.6%. Most of the restructuring was attributable to this division, in order to reduce the overcapacity. Out of the total $496 million restructuring expense incurred by the company, $460 million was attributed to this division.

FedEx Express contributes more than 60% to the company’s top line, but there has been a downward pressure on the revenue per package (also known as yields) for quite some ,time due to a shift towards the cheaper services. Although the domestic yield grew 1%, international yield dropped 2%. Downward pressure on the yields combined with a grim volume forecast are the reasons why we think the division’s profitability to the total company will be limited in the future.

We have revised our estimate to $112 for FedEx, which is about 15% above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. FDX 8-k [] []