FedEx Earnings Preview: Local Growth Could Offset The Effect Of Global Slowdown And Falling Fuel Prices

FedEx (NYSE:FDX) is set to release its earnings for Q1 FY16 on September 16. The company’s stock has fallen almost 20% since the last earnings report, due to growing concerns amid the slowdown in China and other key markets. However, the growing e-commerce trend could help its local Ground segment compensate for headwinds from such markets.

Last quarter, FedEx grew at a sluggish 2.5% year-over-year to reach $12.1 billion. The company’s adjusted earnings per share grew at 4.7%, to reach $2.66, which was close to the consensus estimate of $2.68. FedEx expects its adjusted earnings for fiscal 2016 to grow to $10.60-11.10 per diluted share, driven by an increase in base pricing and continued benefits from profit improvement programs such as aircraft replacements (the guidance does not include any impact from the TNT acquisition). FedEx expects its capital spending to be approximately $4.6 billion for fiscal 2016. ((FedEx Corp. Reports Fourth Quarter Earnings, FedEx News Release))

See our complete analysis of FedEx here

Possible Local Growth:

Though business on the global front seems uncertain, due to the economic slowdown globally, FedEx could see advances in the local U.S. market, especially in the FedEx Ground segment, which accounts for about 59% of our Trefis Price. This is mostly due to a rise in e-commerce. The retail spending in the U.S. e-commerce space is up 14.1%, at $83.9 billion, in the last quarter when compared to the same quarter last year. ^[1] These numbers are only expected to grow further in the coming months, especially around the holiday season.

Over the past two years, FedEx has invested close to $2 billion in its Ground segment. ^[2] For the fiscal year 2016, FedEx plans on spending $4.6 billion on capital, a majority of which will be in the Ground segment. This move seems consistent with the pattern in which e-commerce is anticipated to grow in the upcoming quarters, which could lead to higher profits in the future.

Given the heavy investments and new software tools to optimize packaging routes, FedEx seems to be doing the right things in order to best capitalize their business in this growing market.

TNT acquisition:

Europe is a highly sought after region for companies such as FedEx and UPS who are trying to increase operations there. The GDP in the EU is expected to grow at 1.5% in 2015 and 1.9% in 2016, driven by the quantitative easing program launched in March and declining oil prices. In order to capitalize on the growth, FedEx has been actively pursuing expansion strategies in Europe, one of which is the TNT acquisition. ^[3]

According to data available from 2013, FedEx’s share in the European market was only around 5%, whereas TNT’s was 12%. Following the closure of the deal in the first half of CY 2016, subject to regulatory approval, FedEx will become the second largest player in Europe, only after DHL, with a 19% market share.

The deal will not only benefit FedEx’s business in Europe, but is also set to increase reach and offerings in Latin America, where FedEx and TNT have invested heavily over the past 6 years. Having a foot in a growing market like Latin America could surely help profits grow in the future. ^[4]

Falling Fuel Prices:

Though the points highlighted above seem positive, FedEx could face a possible headwind due to the fall in fuel prices. Fuel prices have shown little indication of going up in the near future. Though lower fuel prices should intuitively help a logistics business, last quarter’s results have proved otherwise. Despite having higher profits due to increased business volumes in all three segments – Express, Ground, and Freight – the numbers were partially offset due to lower fuel surcharge revenue. ^[5]

The fuel surcharge for FedEx Express is updated every first Monday of the month. It is based on the two month lagged U.S. Gulf Coast spot price for a gallon of kerosene-type jet fuel. There have been marginal increases in the fuel surcharge rates earlier this year, reaching its peak of 11%. However, a declining trend has been witnessed in the last two months of this quarter, with the current fuel surcharge rate standing at 8.5%. ^[6]

Fuel surcharge for FedEx Ground is updated monthly as well, and is based on the two month lagged average price of the U.S. on-highway diesel fuel. Since the beginning of this quarter, the surcharge has remained constant, at a rate of 4.5%, with a fall witnessed only in the current month to 4%.

These relatively lower rates could have an adverse impact on the top line if FedEx’s growth is slower than anticipated. Apart from this, the stronger dollar could also hamper growth in revenues.

All in all, this quarter could see good results due to the promising Ground segment and new acquisitions. In terms of numbers, the consensus estimate for EPS this quarter stands at $2.45, with $12.23 billion in revenue, which is a 17% and 5% year-on-year growth, respectively. However, the global slowdown could hinder growth more than expected, leading to some strain on the company’s top and bottom lines. We’ll just have to wait and see on which side the coin lands.

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1. Quarterly E-commerce Report Historical Data, census.gov [↩]
2. FedEx to Report Earnings, fool.com [↩]
3. FDX-TNT Acquisition, forbes.com [↩]
4. FedEx TNT Deal to Boost Latin American Footprint, joc.com [↩]
5. Fuel Continues to Temper Growth, forbes.com [↩]
6. FedEx Express Fuel Surcharge, fedex.com [↩]