Ground And Freight Growth Drives Fedex’s Quarterly Results While Express Remains Stagnant

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FedEx Corporation (NYSE:FDX) announced its fourth quarter results ending May 31st (fiscal year ends May 31st) on June 18 2014 reporting higher revenue and net income. Its revenue grew 4% and net income grew a staggering 141%. [1] The primary reason for the increase in net income are the adjustments made to FedEx’s Express segment in the fourth quarter of fiscal year 2013 which led to zero net income from the segment. [2] These adjustments included business realignment and impairment charges which are essentially non-cash charges.

The high net income drove up earnings per share by 159% to reach $2.46. Also contributing to the increase was the repurchase of 9.9 million shares of FedEx common stock during the quarter. The strong cash flow from the quarter has allowed FedEx to increase their future quarterly dividends by 33%. [3]

During their fourth quarter earnings meet, FedEx announced its guidance of $8.50-$9.00 earnings per diluted share in the fiscal year 2015, a growth of 26%-34% from fiscal year 2014. [4] The stock market reacted positively to FedEx’s earnings, driving up the market price by 6.16% since the previous day’s close.

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FedEx Ground’s revenue rises on the back of rate increase and e-commerce demand; SmartPost disappoints

In the fourth quarter, FedEx’s Ground segment revenue grew due to strong e-commerce demand and rate increases. Revenue increased 8% driven by a 9% growth in the FedEx Ground service which was partially offset by a 2% decline in the FedEx SmartPost service. [1] The decline in FedEx SmartPost comes as a surprise since the service’s revenue grew 16% in fourth quarter of fiscal year 2013 and has shown consistent growth through the first three quarters of fiscal year 2014.

FedEx states that SmartPost volumes declined 8% in the quarter due to a change in shipping patterns from one large customer. [4] Excluding the volume from that customer, SmartPost volume increased 15%. This makes us think about the highly concentrated nature of SmartPost’s volume which makes it a high risk business. The one large customer, whom FedEx has not named, had decided to directly use the U.S. Postal Services instead of using SmartPost (SmartPost uses the services of the U.S. Postal Services to make final delivery to any residential address or PO Box in the U.S.). FedEx management believes that they will be able to replace the lost volume, however, they have not outlined any plans that have been set in place to do so.

FedEx Ground service’s average daily volume increased 8% primarily due to high demand from e-commerce industry. E-retailers prefer using cheaper means of shipping their products so that they may pass on the benefits of low costs to their customers. Many e-retailers are able to offer free shipping service because of the low shipping cost incurred by the e-retailer. Revenue per package for Ground grew 2% driven by the rate increase introduced on January 6 2014.

For the fiscal year 2015, we expect to see continued growth in FedEx’s Ground segment. We believe that the new dimensional weight pricing mechanism, which will be effective from January 2015, will have a major role to play. The new pricing mechanism will not only help growth in revenue but also help improve margins due to better price realization. The FedEx Ground service will continue to grow on the back of strong e-commerce demand. However, after looking at the quarter’s results for SmartPost, we do not expect to see growth in the service in the coming quarters. This may present headwinds for the Ground segment in the fiscal year 2015.

FedEx Freight shows strong performance

FedEx Freight reported 12% growth in revenue reaching $1.55 billion. [1] The segment’s less-than-truckload (LTL) volume grew 12% on the back of 14% growth in its Priority service.  Revenue per shipment and the segment’s margins improved primarily due to higher weight per shipment. Improvements in the network and operations optimization also helped drive the 5.2% increase in the segment’s operating margin.

Going forward we expect to see an increase in the segment’s revenue driven by the revision in fuel surcharge, which was increased three percentage points effective from June 2 2014.

FedEx Express revenue again remains stagnant

FedEx Express revenue remained stagnant at $6.9 billion in the fourth quarter, making it the second consecutive quarter of zero growth. [1] Growth in Express Package revenue and revenue from FedEx Trade Networks and FedEx SupplyChain Systems was offset by declines in Express Freight revenue. The segment continues to be impacted by the shift in customer preference towards delayed yet cheaper delivery services. The U.S Deferred service average daily volume grew 7% whereas U.S. Overnight volume grew only 1% after being negatively impacted by an 8% decline in U.S. Overnight Envelope service.

International package volumes were also impacted by the same trend. However, package volumes for the International Priority Service were stable in the fourth quarter after having declined through the first three quarters of the fiscal year. International Economy volumes grew 5%. Higher revenue per package helped International Export and Domestic package revenue grow 2%.

FedEx has been trying to expand its international operations in a bid to improve its performance. On May 1 2014, FedEx completed the acquisition of Supaswift businesses in South Africa, Botswana, Malawi, Mozambique, Namibia, Swaziland and Zambia. This should help drive volume growth for its international operations. However, it does not assure us of any significant improvement in volume for FedEx International Priority. FedEx needs to focus on improving volumes at its International Priority service since it accounts for a major portion of the international revenue and volume and also commands high yields. Without growth in this service, international revenue growth will remain sluggish.

We will soon be updating our price estimate for FedEx after incorporating the fourth quarter results.

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Notes:
  1. FedEx Q4 Earnings Release, June 18 2014, www.fedex.com [] [] [] []
  2. FedEx Q4 Stat Book, June 18 2014, www.fedex.com []
  3. FedEx Corp. Announces Increase in Quarterly Dividend, June 9 2014, www.fedex.com []
  4. FedEx’s (FDX) CEO Fred Smith on Q4 2014 Results – Earnings Call Transcript, June 18 2014, www.seekingalpha.com [] []