FedEx Severely Disappointed But Is It Still Attractive?

On Wednesday December 18th, 2013, FedEx (NYSE: FDX  ) reported earnings that fell somewhat short of expectations. Despite this shortcoming, shares of the world's second largest transportation and logistics company rose 0.45%, but lagged the 1.66% jump of the S&P 500. In light of the company's relatively poor metrics, does it make sense for the Foolish investor to buy into FedEx or would your money be better off in shares of United Parcel Service (NYSE: UPS  ) ?

Earnings fell far short of expectations
During the quarter, FedEx chalked up revenue of $11.4 billion, just shy of the $11.43 billion that analysts expected but 3% above the $11.11 billion the company reported the same quarter a year ago. According to the company's earnings release, the primary driver behind this increase in revenue came from its FedEx Ground segment. Although this particular segment only comprised 25% of revenue for the quarter, its 9.9% growth from $2.59 billion to $2.85 billion made up nearly 90% of the company's growth.

In addition to seeing growth from its FedEx Ground segment, the company also experienced some growth from its FedEx Freight segment. Compared to the same quarter a year earlier, revenue in this segment rose 4.1% from $1.38 billion to $1.43 billion. Meanwhile, management reported that the largest segment, FedEx Express, stayed roughly even year-over-year and that its smallest segment, FedEx Services, declined by 3.5%.

On an earnings basis, FedEx saw significantly better performance compared to last year, but ultimately fell far short of analyst expectations. For the quarter, the company reported earnings per share of $1.57. This represents a 12.9% increase compared to last year (though only a 4.7% increase if you adjust for the negative impact of Superstorm Sandy), but fell short of the $1.63 that Mr. Market had hoped for.

Even though management reported an increase in the number of shares outstanding, earnings per share improved largely due to a decrease in expenses. Most of this improvement took place in the company's FedEx Express unit, which saw a 41.7% increase in operating income, most of which came from lower fuel prices, and maintenance and repairs.

FedEx looks good but United Parcel's results were more impressive
Unfortunately, both FedEx and United Parcel have different fiscal years so it's impossible to place them side-by-side and expect a perfect comparison. However, by examining United Parcel's most recent quarterly performance, we can get a better glimpse of how strong FedEx's results were compared to its largest competitor.

For United Parcel's most recent quarter, ending September 30th, revenue came in at $13.5 billion. This represents a 3.4% increase over the $13.1 billion the company reported the same quarter a year earlier. The company's primary driver for the quarter was its U.S. Domestic Package segment, which rose 5% from $7.86 billion to $8.25 billion. Similarly, management reported a nice 2.5% uptick in its International Packages segment, but fell short on its Supply Chain & Freight segment.

On an earnings per share basis, the company reported a nice increase of 9% from $1.06 (excluding the one-time charge assessed to the company when it restructured its pension plan) to $1.16. This increase is more than twice the size of FedEx's increase if you remove the company's negative impact from Superstorm Sandy and stemmed from lower costs relative to revenue.

Foolish takeaway
Based on the data provided by FedEx this quarter, we can see that the company performed quite well, but not up to analyst expectations. This, combined with United Parcel's better performance during its third quarter could result in downside pressure for FedEx over the short-run, but it's hard to say that an investment in FedEx would be terrible.

With a market cap of $44 billion, the company is large and it would be unlikely to fail given its systemic importance. This, combined with the company's history of growth and innovation, likely means it will remain an attractive investment for a long-term investor focused on good, steady growth and a reasonable economic moat.

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