FedEx Earnings Preview: Margins In Focus Amid Uncertain Growth Drivers

FedEx Corporation (NYSE:FDX) is scheduled to report its first quarter earnings of fiscal 2014 on September 18. The company announced a change in its earnings guidance outlook from quarterly to yearly and anticipates EPS growth between 7% and 13% for fiscal 2014. ^[1] However, this guidance could be lower if the weakness in the global economy that has impacted the demand for its services particularly the higher-priced express services continues to worsen. On the flip side, cost cutting efforts such as phasing out older airplanes and engines and a $200 million reduction in pension contribution for the entire fiscal 2014 should provide some margin relief. ^[2]

We currently have a stock price estimate of $112 for the company, approximately in line with its current market price.

See our complete analysis of FedEx here

Weakness In Global Economy Impacting Demand For Premium Services

The slowdown in Europe due to the euro crisis, slowing growth in developing economies, and a weak economic environment in the U.S. have caused a shift in demand from FedEx’s higher-priced express services to its lower-priced ground services. This is impacting its top-line growth. In addition to weak global demand, the ongoing Syrian crisis has caused a lot of concern for companies and industries reliant on fuel and that use shipping services.

However, a few acquisitions made will partially offset this impact. In the first quarter of fiscal 2013, FedEx completed three major acquisitions: Opek Sp. z. o. o., a Polish domestic express package delivery company for $54 million; TATEX, a French express transportation company for $55 million; and Rapidao Cometa Logistica, a Brazilian transportation and logistics company for $398 million. ^[3]

Older Aircraft Retirement Efforts Will Help Margins

The company has also been adjusting its cost structure to bring it in line with the altered demand scenario. In June 2013, it announced that it will permanently retire or accelerate the retirement of 86 older aircraft and 308 engines. The older Boeing 727-200 aircraft will be replaced with Boeing 767-300 and 757-200 aircraft that are more fuel-efficient and have lower maintenance costs.

By June 2013, FedEx retired two A310-200 aircraft and four related engines, three A310-300 aircraft and two related engines and five MD10-10 aircraft and fifteen related engines. The company has so far incurred an impairment charge of $100 million in relation to the retirement of the above mentioned aircraft and expects an additional D&A expense of $74 million in fiscal 2014. Despite the increased impairment and D&A expenses, we believe these fleet adjustments will lower operating expenses for the company in the long run. However, these adjustments are not expected to fully compensate for the impact from lower demand for premium shipping services and pension contributions.

Pension Contributions To Soften In FY2014 As U.S. Interest Rates Rise

Until 2012, the historically low interest rates have lowered returns on pension plan assets for the company. The underfunded portion of pension liabilities increased to $4.85 billion at the beginning of fiscal 2013 from $1.53 billion at the beginning of fiscal 2012. ^[4] As a result, FedEx had to contribute $140 million in the first quarter of fiscal 2013 and made another payment of $140 million in September 2012 towards pension liabilities. With interest rates rising in the U.S. in recent times, the company anticipates a reduction of $200 million towards pension liabilities for the entire fiscal 2014 due to strong investment returns and a higher discount rate. ^[2] This reduction along with the ongoing cost reduction efforts should reflect in higher margins for fiscal 2014.

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

1. FedEx Corp. Reports Fourth Quarter Earnings, FedEx Investor Relations [↩]
2. FedEx’s CEO Discusses F4Q 2013 Results – Earnings Call Transcript, Seeking Alpha, June 2013 [↩] [↩]
3. Fiscal 2013 Q1 10-Q, FedEx Investor Relations [↩]
4. Fiscal 2012 10-K, FedEx Investor Relations [↩]