FedEx Q2 Earnings Preview: Holidays To Boost Ground Revenues, Express Segment Recovery In Focus

FedEx Corporation (NYSE:FDX) is scheduled to report its Q2 FY14 results on December 18, 2013. The continued weakness in consumer and industry-wide spending, coupled with migration of demand towards cheaper logistics services, contributed to FedEx underperforming the market in fiscal 2013 (ended Mary 30th). Through fiscals 2011-2013, FedEx’s stock rose a meager 15% compared to S&P 500’s 50%. United Parcel Service (NYSE:UPS)shares also outperformed FedEx stock,  with 37% appreciation during the same period.

Nevertheless, FedEx’s stock has seen strong momentum coming into fiscal 2014. It has grown approximately 44% to date compared to 11% for S&P 500 and 18% for UPS. We believe this share price growth is a result of reinforced optimism in the company’s business. FedEx posted revenues of $11.0 billion for Q1FY14, beating analyst estimates of $10.97 billion. This signals a recovery in the company’s business performance. Additionally, operating and net income margins during the quarter expanded modestly as FedEx continued with its fleet upgrade program to reduce operational expenses. On a year-on-year basis, the operating margin for Q1FY14 stood at 7.21% compared to 6.88% in the prior year.

For the current quarter, we expect Ground segment revenues to be supported by strong holiday season sales, fueled by the expansion in consumer discretionary income and a strengthening U.S. economy. We expect further margin expansion as FedEx phases out its existing cargo fleet.

We currently have a Trefis price estimate of $139 for FedEx, in line with the market price.

See our complete analysis of FedEx here

Strong Top Line Expected From Double Digit Growth In Ground Deliveries

Logistics operators are positioned to benefit from the forthcoming holiday season. Although online retailers are cautious in their outlook for the holiday season demand, FedEx and UPS expect package volumes to grow as much as 10% from last year’s peak seasonal demand. FedEx reported that it expects package volumes to grow 11% over last year, fueled by the burgeoning U.S. e-commerce market. ^[1] Furthermore, global macroeconomic weakness has depressed revenues for pricier transportation services such as airfreight while inflating ground revenues for the company. FedEx’s Ground segment revenue increased from $2.46 billion in Q1FY13 to $2.73 billion last quarter, supported by rising e-commerce sales and weaker performance in premium transportation services.

Going forward, we expect a strong performance from FedEx’s Ground segment on tepid consumer spending. However, we could see some demand shift toward pricier offerings this holiday season due to a shorter duration. The holiday season in 2013 is 26 days long, making it the most compressed holiday season since 2002. ^[2] This could provide some respite to FedEx’s Express segment, which has seen its top-line erode in the past few quarters, by forcing consumers and e-commerce players to resort to transportation modes that are quicker than the traditional Ground services.

FedEx’s International Shipment Services Should Remain Weak Despite Market Recovery

In addition to explosive growth in the global e-commerce industry, weak currencies of various emerging markets in 2013 have bolstered the export industry across global trade lanes. According to CPB Bureau of Economic Policy Analysis, trade volumes in Q3CY13 grew 1.1% following a 0.3% increase in Q2CY13, indicating a stronger performance in global trade. ^[3] We believe weak currencies are primarily attributable to this sharp increase in global trade. However, trade volumes should continue to see growth going forward as economies of export majors such as China and Germany become stronger.

FedEx provides a variety of domestic and export and cargo shipment services using its airfreight cargo fleet. Last quarter the company reported a 2% decline in international express export shipments, in addition to double digit declines in its international airfreight division. The weakness in FedEx’s international segments, despite a good market performance, is a result of the company’s costlier offerings. Although weak currencies resulted in improved package volumes for exporters, the positive effect of expanded package volumes was negated by the unfavorable exchange rate against the U.S. dollar for logistics operators. Going forward, we believe that FedEx has limited upside resulting from an upswing in global trade due to its pricier offerings.

We will be revising our price estimate of $139 for FedEx after the company files its results with the SEC.

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

1. Online Shopping Boosts FedEx Holiday Volume, FedEx Newsroom, October 2013 [↩]
2. UPS Holiday Pick-Ups to Exceed 34 Million Packages on Peak Day, UPS Investor Relations, October 25 [↩]
3. CPB World Trade Monitor (including September 2013), CPB Data, November 2013 [↩]