FedEx Earnings: Stock Down Despite Surge In Profits

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FedEx’s (NYSE:FDX) stock declined 1.4% on Wednesday, March 18, despite a 53% increase in its fiscal third quarter net income. [1] The company also beat consensus earnings per share estimates of $1.88, reporting earnings per share of $2.01, an increase of 63% year-on-year, as lower fuel costs and increase in pricing drove operating margins. However, investors reacted negatively to the revenue miss and narrowed earnings per share guidance for fiscal 2015.

FedEx’s third quarter revenues crossed $11.7 billion, growing 4% year-on-year, but missed consensus estimates of $11.8 billion. The market’s expectation for the company’s full year EPS was $8.98, but FedEx narrowed its guidance from $8.50-9.00 to $8.80-8.95, leaving investors disappointed.

See our complete analysis of FedEx here

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Lower Fuel Prices Temper Revenue But Help Operating Income

FedEx’s revenues benefited from strong volume growth in all three segments – Express, Ground and Freight – partially offset by lower fuel surcharge as a result of the declining fuel prices.

FedEx Ground’s fuel surcharge is based on the two month lagged average price of the U.S. on-highway diesel fuel, which declined 7.5% year-on-year in the three months ended December 2014. [2] Despite this, Ground revenue per package grew 3% driven by the increase in base rates and dimensional weight pricing charges, which were effective from the beginning of the year. [1] Rates of all Ground services were increased by an average of 4.9%. [3]

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, which declined 24.4% year-on-year in the three months ended September 2014. [4] Express revenues were flat as a result of the lower fuel surcharge and weak foreign currencies, which completely offset the benefits of an increase in base rates and growth in volume.

The benefit from declining fuel prices more than compensated for the lower fuel surcharge by substantially reducing FedEx’s fuel bill. In the third quarter, its fuel expenses declined 30%, driving operating income up by 50%. [1] FedEx experienced a significant net benefit from the declining fuel prices since fuel expenses are based on spot prices, which declined steeply compared to the reference rates for fuel surcharges. U.S. on-highway diesel fuel declined 21% year-on-year and the U.S. Gulf Coast spot price for a gallon of kerosene-type jet fuel declined 43% year-on-year in the three months ended February 2015. [2] [4]

Outlook Narrowed On Fourth Quarter Headwinds

FedEx’s lower than expected fiscal year earnings guidance comes as a result of fourth quarter headwinds, primarily relating to fuel and foreign exchange. [5] FedEx does not expect to see any benefits from fuel price declines in the fourth quarter, which was the major driver of net income in the third quarter. Additionally, weak foreign currencies are likely to continue tempering Express revenues. FedEx is also planning to increase the funding of its incentive compensation programs, which will drive up operating expenses.

Despite the headwinds, FedEx is likely to post high single-digit earnings per share growth in the fourth quarter. The company should benefit from the revised base rates, which were increased by an average of 4.9% across all services, effective from January 5. Dimensional weight pricing should contribute to revenue per package growth at the Ground segment. As was seen in the third quarter, FedEx’s recent acquisitions, Bongo International and GENCO are unlikely to have any material impact on the company’s financials.

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Notes:
  1. FedEx Q3 FY 2015 Earnings Release, March 18, 2015, www.fedex.com [] [] []
  2. U.S. On-Highway Diesel Fuel Prices (dollars per gallon), www.eia.gov [] []
  3. FedEx to Increase Shipping Rates for Express, Ground and Freight Services, September 16, 2014, www.fedex.com []
  4. U.S. Gulf Coast Kerosene-Type Jet Fuel Spot Price FOB, www.eia.gov [] []
  5. FedEx (FDX) Frederick W. Smith on Q3 2015 Results – Earnings Call Transcript, March 18, 2015, www.seekingalpha.com []