High Volume And Fuel Surcharge Drive FedEx’s Earnings

FedEx Corporation (NYSE:FDX) announced its first quarter fiscal year 2015 results ending August 31, 2014, (fiscal year ends May 31) reporting a 6.0% year-on-year growth in revenues to reach $11.68 billion. ^[1] Strong volume growth across all three segments – Express, Ground and Freight – contributed to the revenue growth. In addition, higher fuel surcharges helped drive up revenue per package leading to improvement in revenue, operating margins and yields, which increased 130 basis points to reach 8.5%. The higher operating margin, which was also driven by FedEx profitability improvement programs initiated in fiscal year 2013, boosted net profits by 24%.

FedEx’s earning per diluted share for the quarter increased 37.25%, to reach $2.10, due to the increase in net profit and buyback of 5.3 million shares of FedEx common stock, which added $0.15 per diluted share. The company reaffirmed 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. ^[2] The capital spending forecast for fiscal year 2015 remains $4.2 billion.

See our complete analysis of FedEx here

Strong volume growth across all segments

All three segments of FedEx saw an increase in volume. Express volumes grew 4.0% driven by higher demand for its economical services such as U.S. Overnight Box, U.S. Deferred and International Economy. Its premium services, which include U.S. Overnight Envelope and International Priority, continued to suffer due to customers prioritizing cost over timely delivery. U.S. Overnight Envelope volumes declined 6.4% and International Priority managed a weak 0.7% growth. FedEx Freight average daily shipments increased 10.6% driven by low-teens growth in its Priority service.

FedEx’s Ground segment volumes continued to benefit from the e-commerce boom. The U.S. Retail e-commerce sales grew 15.5% and 15.7% in the first two quarters of 2014, benefitting FedEx’s Ground service’s average daily volumes, which grew 6.1% during the first quarter fiscal year 2015. We expect Ground volumes to continue to increase in throughout fiscal year 2015 driven by growth in the North American e-commerce industry, which is forecast to grow 32.9% in 2014 and 31.7% in 2015. ^[3] However, this growth may be partially offset by the declining volumes for FedEx’s SmartPost service. Similar to the fourth quarter fiscal year 2014, SmartPost average daily volumes declined 10.2% due to a change in shipping patterns from one large customer, whom once again FedEx has not named. We believe that the loss of this customer will continue to impact SmartPost volumes throughout the fiscal year 2015. Though FedEx’s management believes that they will be able to replace the lost volume, they have not outlined any plans that have been set in place to do so.

Higher fuel surcharge contributed to yield improvement

Complementing the increase in volume, higher fuel surcharge helped drive revenue and yields. FedEx Express’ fuel surcharge is based on the two month lagged U.S. Gulf Coast spot price for a gallon of kerosene-type jet fuel. This means that fuel surcharge for the months of June, July and August are based on the average spot price in the months April, May and June respectively. As per our calculations based on the FedEx Express Fuel Surcharge chart ^[4] and kerosene-type jet fuel spot price, ^[5] fuel surcharges for FedEx Express’ U.S. packages for the first quarter fiscal year 2015 increased 120 basis points to 9.5%, compared to 8.3% in the first quarter fiscal year 2014. This increase contributed 0.5% to the 1.0% improvement in U.S Packages yield. ^[6] Similarly, fuel surcharges contributed 1.0% towards the 2.9% increase in international export package yield.

FedEx Ground’s fuel surcharge is based on the two month lagged average price of the U.S. on-highway diesel fuel. As per our calculations based on the FedEx Ground Fuel Surcharge chart ^[4] and U.S. on-highway diesel fuel prices, ^[7] fuel surcharge for FedEx Ground packages for the first quarter fiscal year 2015 increased 16 basis points to 6.83%, compared to 6.66% in the first quarter fiscal year 2014, contributing 0.1% to the 3.1% improvement in Ground yield. ^[6] The remaining increase in margin was driven by rate increases which were effective from January 2014. FedEx Freight’s yield per shipment improved 2.6%, of which 1.4% was contributed by an increase in fuel surcharge.

Operating margins and yields should continue to increase

A day before the release of its first quarter earnings, FedEx announced that will be increasing the rates of all its services by an average of 4.9% effective January 5, 2015. ^[8] The increase in rates should help drive revenues and operating margins. For FedEx Ground, this comes as an addition to the prior announcement of following dimension based pricing for all shipments. Dimension based pricing, as opposed to weight based pricing, will lead to better price realization for bulky yet light weight e-commerce packages. This will significantly improve margins at FedEx’s Ground segment. Dimensional pricing for all Ground packages will also be effective from January 5, 2015.

We will shortly be updating our price estimate of $140 for FedEx after incorporating this quarter’s results in our model.

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1. FedEx Q1 FY15 Statistical Book, September 17, 2014, www.fedex.com [↩]
2. FedEx Q1 FY15 Earnings Release, September 17, 2014, www.fedex.com [↩]
3. Worldwide Ecommerce Sales to Increase Nearly 20% in 2014, July 23, 2014, www.emarketer.com [↩]
4. Fuel Surcharges, wwww.fedex.com [↩] [↩]
5. U.S. Gulf Coast Kerosene-Type Jet Fuel Spot Price FOB, www.eia.gov [↩]
6. FedEx’s (FDX) CEO Mike Glenn On Q1 2015 Results – Earnings Call Transcript, September 17, 2014, www.seekingalpha.com [↩] [↩]
7. U.S. On-Highway Diesel Fuel Prices (dollars per gallon), www.eia.gov [↩]
8. FedEx to Increase Shipping Rates for Express, Ground and Freight Services, September 16, 2014, www.fedex.com [↩]