FedEx Earnings Preview: Trends We’re Watching Thursday

The logistic services company FedEx (NYSE:FDX) is all set to release its Q2 2012 results Thursday. The company saw international growth moderate the past quarter in light of weakness in its Asian lanes though the company continued to invest in the region and opened its largest express facility in China and expanded its express economy services in the region. (See FedEx Express opens largest operation station in Pudong Sanlin, China) (See FedEx Expands Reach of FedEx International Economy Service in Asian) The market is especially important for its express offerings and is expected to account for the bulk of their growth for the foreseeable future. Primary competitor UPS (NYSE:UPS) is also increasing capacity on Asia lanes after determining that a Q3 slowdown in volumes was an isolated occurrence.

Riding on international expansion, we expect FedEx second quarter results to benefit from strong yields for international operations and improving performance of its Express segment. Domestic and international express services for package delivery and freight transportation account for about 46% of the stock value for FedEx. Besides, FedEx Express is the market leader in U.S. and #1 air exporter from U.S., Asia-Pacific, Latin America and Canada.

We currently have a $98.14 Trefis price estimate for FedEx Corp., which is about 24% ahead of the market price on the last close.

See the Trefis full analysis for FedEx

High-tech traffic and focus on yield improvement providing momentum to FedEx Express

High-tech and high-value-added goods have increased as a percentage of total economic output, and various FedEx operating companies offer a unique menu of services to fit virtually all shipping needs of high-tech and high-value-added industries.

Given momentum from high-tech traffic growth, Fedex saw a strong first quarter last year. However, following the slowdown in Asian exports, Q1 2012 comps turned out to be dismal at Express in terms of volumes and margins also suffered. The company witnessed a shift in the shipping patterns for high-tech traffic at its international express operations from Q1 to Q2 this year, aided by the new tech product launches. This should  impact Q2 comps favorably and the company could record higher volume growth as compared to a modest 0.6% y-o-y package growth seen in Q1 2012 at Express.

Volumes at Express are expected to benefit from Fedex’s recent expansion across Europe, Asia and Latin America using both inorganic means such as the acquisitions in India and Mexico this year as well as investments in station operations, sales and marketing. The acquisitions will give Fedex more robust domestic transportation networks and added capabilities in important global markets, and we expect this could provide some important contributions to the long-term growth, productivity and profitability at Express.

The focus on international expansion is especially key for Express segment as yields on international packages far exceed domestic yields and are the lever for margin improvement at Express. For FY 2011, International Priority shipments yield were $56 vs. $16 for U.S. domestic shipments.

This September, FedEx also announced the new increased shipping rates for FedEx Express, higher by a net average of 3.9% for U.S. domestic, U.S. export and U.S. import services effective January 2, 2012. This will boost yields and margins at the division going forward.

At JPMorgan’s Aviation, Transportation & Defense Conference this March, the company management stated:

Our margin focus at Express is really dependent on yields. Our yields, on a base basis, are probably not where they were in 2007. That’s how competitive the marketplace has been, and we understand that we have to get paid for what we do, and we are working very hard with unbelievable great sales and marketing team and our pricing folks, and we are driving yields up. It’s the number one focus that we have in FY12. We have to get those yields back up to compensatory rates, and that’s across our entire system at Express and Freight, not so much at Ground.

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