FedEx Isn't as Bad as It Appears

Source: Wikimedia Commons. 

After the company reported revenue and earnings that fell short of expectations on March 19, shares of FedEx (NYSE: FDX  ) receded 0.5% in pre-market trading. With such a timid response to a release that was undoubtedly anything but beautiful, has Mr. Market signaled that FedEx still has attractive prospects or should shareholders look to United Parcel Service (NYSE: UPS  ) for returns?

FedEx fell far short of expectations!
For the quarter, FedEx reported revenue of $11.3 billion. This represents a 3% gain from the $10.95 billion that management reported in the year-ago quarter, but it fell short of the $11.43 billion that analysts anticipated. According to founder and CEO Frederick Smith, "historically severe winter weather" affected operations. On days when the weather was typical, FedEx's volume and service level stood their ground. 

The lackluster revenue the company experienced, combined with higher costs, resulted in depressed profits. For the quarter, non-GAAP earnings per share came in at $1.23. This was 9% higher than the $1.13 the company brought in the year-ago period, but it was 16% below the $1.46 that Mr. Market hoped to see.

Despite the fact that a 3% reduction in shares outstanding helped the company's results, purchased transportation rose from 17.1% of sales to 18.3% which hurt the company. Fortunately, salary and employee benefits declined from 37.9% of sales to 36.9% and fuel expenses fell from 11.1% of sales to 10.3% which more than offset the rise in transportation costs.

FedEx isn't the only player having difficulties

Source: Wikimedia Commons. 

While it may be tempting to condemn FedEx for its results and say that the company may be making excuses for its poor performance, evidence suggests that the company isn't alone in its plight. In its most recent quarter, rival UPS saw its revenue tick up only 3% from $14.57 billion to $14.98 billion. 

In its earnings release, management attributed the lackluster sales growth to inclement weather in combination with a 1.3% drop in revenue per package as fuel surcharges, product and customer mix, and higher service refunds negatively affected the company.

As a result of these factors, United Parcel Service also missed earnings estimates. For the quarter, the company saw its earnings per share come in at $1.25. This was far higher than the $1.83 loss per share the business booked in the year-ago period (which resulted from a mark-to-market pension charge), but it fell shy of the $1.43 analysts that hoped to see.

  Earnings Estimates Actual Earnings Shortfall
FedEx $1.46 $1.23 -15.8%
UPS $1.43 $1.25 -12.6%

Source: FedEx and UPS. 

Foolish takeaway
Based on the data provided, it looks as though FedEx performed less than ideally this quarter, but weather-related troubles have taken a toll on its larger competitor as well. For this reason alone, shareholders should not take the company's shortfall too much to heart and should, instead, look to how expectations call for the business to perform moving forward.

According to management, FedEx expects to see its earnings for the year fall in somewhere between $6.55 and $6.80 per share. Although this represents a slight miss from the $6.90 that analysts estimated, it's still higher than the $6.23 per share in adjusted earnings that the company reported last year. The company also expects a revenue rise of 3% from $44.29 billion to $45.59 billion. This suggests that while down the road FedEx won't grow as fast as it has in the past, the business is still growing and improving its profitability in the process.

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9/2/2014 4:02 PM
FDX $150.40 Up +2.52 +1.70%
FedEx CAPS Rating: ****
UPS $97.95 Up +0.62 +0.64%
United Parcel Serv… CAPS Rating: ****

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