Economic bellwether FedEx (NYSE: FDX) recently came out with its quarterly report, which as usual had investors digging for clues as to the state of the global economy. This release was a mixed bag. On the one hand, the company missed on both the top and the bottom lines, which was somewhat worrying. On the other hand, an upbeat outlook and enthusiasm going into the holiday quarter offered investors some solace. Let's take a look at the main takeaways from the report and how FedEx stacks up against United Parcel Service (NYSE: UPS)?
On the face of it, the company's results weren't too good. While quarterly profit rose a healthy 14% year over year, earnings per share of $1.57 missed the $1.64 consensus. Revenue came in slightly below expectations as well, rising 3% overall to $11.4 billion.
Reversing the trend seen earlier this year, the company's ground-shipping division saw volume growth slow to 8%, versus a previous 10% and below the 10% expected by some. As this division is closely linked to e-commerce deliveries, the figure was somewhat disappointing.
One of the main issues FedEx has had to deal with in recent times is a slowdown in its express business, as a weak spending environment has led many customers to opt for slower and cheaper delivery options. As such, the company has undertaken a number of measures to boost the struggling division, such as retiring older airplanes and moving some shipments to passenger planes. According to management, this has been paying off, with some yield improvement in the segment.
The results are, as usual, similar to those of prime competitor United Parcel Service. Its most recent report showed EPS up around 9.4% to $1.16 on a 3.4% overall revenue increase. However, US domestic ground volume growth didn't do nearly as well, with an increase of only 3%. Like FedEx, UPS is feeling the pinch from consumers shifting to lower-cost delivery methods, UPS citing an 11% increase in international deferred daily export products.
Optimistic outlook and drone wars
Countering these less-than-stellar figures from FedEx was an upbeat outlook going into the holiday quarter. Full-year EPS growth is now expected to be between 8% and 14%, versus a previous estimate of between 7% and 13%. Partly, this increase is driven by the company's share-buyback program. However, FedEx is also expecting big things from the holiday season.
Shipping companies rely on e-commerce websites like Amazon.com (NASDAQ: AMZN) for much of their earnings these days, and a strong performance from the Internet retail giant for this holiday season is likely to benefit the industry. Amazon saw cyber Monday sales rocket 46% this year, with the "cyber five" period sales from Thanksgiving through cyber Monday up 35%. This certainly bodes well for Christmas sales.
Another key takeaway from the report was the CEO's comment on drones. Calling Amazon's intentions to overtake firms like FedEx and UPS using drones "almost funny," CEO Fred Smith did say the company has been experimenting with the technology.
FedEx technology chief Rob Carter in fact owns his own drone, and says it can fly for around eight minutes carrying four Budweiser beers. This is a far cry from the performance Amazon is hoping for from its Prime Air service, but it is a solid indication that several very large companies are making steps toward moving into this type of unmanned delivery. Prime competitor UPS has also indicated its interest in drones.
The bottom line
FedEx's most recent earnings report was a mixed bag. The company missed on EPS and revenue, but gave a decidedly upbeat forecast going into the holidays, as major e-commerce retailers are reporting encouraging sales numbers for cyber Monday and Thanksgiving. Furthermore, the company's comments on drones are an interesting indication as to the prospects of unmanned deliveries, as FedEx CEO Fred Smith does not believe the service will take off any time soon.
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