What Does FedEx Corporation's Q4 Earnings Report Say About Its Present and Future Prospects?

A weather-hit third quarter notwithstanding, courier giant FedEx's (NYSE: FDX  ) fiscal year 2014 that ended in May was "a good year", according to CFO Alan B. Graf Jr., and 2015 could be "even better". The Tennessee-based company beat both top- and bottom-line estimates for the fourth quarter, and expects e-commerce, cost-cutting efforts, and the improving global macroeconomic situation to drive future growth.


Source: FedEx.

Results at a glance
In 2014, FedEx reported total revenue of $45.6 billion compared with $44.3 billion in the past year. Combined revenue for the quarter beat analysts' consensus at Reuters of $11.66 billion, and stood at $11.84 billion, up 3.5% from the year-ago period. Top-line growth trickled down to the courier major's bottom line, which rose by an astounding 34.6% to $2.1 billion for the fiscal year, and more than doubled for the fourth quarter to $730 million over the year-ago quarter's $303 million.

FedEx Express, the company's largest business segment, saw subdued results. For the fiscal year, the segment recorded $27.1 billion in revenue, down 0.2% over last year, while fourth-quarter revenue saw a mild improvement of 0.3% to $7 billion. Overseas priority volume finally improved in the quarter after four straight quarters of declining numbers. Higher rates, increased weights per package, and favorable service mix boosted international export yield by 2% in the quarter, which suggests that FedEx's yield management efforts to maximize revenue and returns could be paying off. The positives, however, were slightly offset by lower revenues from Express freight and fuel surcharge.

The Ground division continues to pick up steam, rising 9.8% to $11.6 billion in the fiscal year against the previous year, thanks to higher shipment of online orders. Quarterly revenue came in at $3.01 billion, up 8% year over year. Average daily volume also rose 8% in the quarter over the year-ago period, and would have been even better had FedEx not lost a key customer to larger rival United Parcel Service.

Ground segment's share in FedEx's total revenue has been increasing steadily from 20% in 2009 to 25% in 2014 as seen in the chart below, while Express' share is gradually shrinking.


Comparing proportion of Express revenue and Ground revenue on consolidated revenue. Source: FedEx Q4 FY14 Stat Book, 10-K 2013, 10-K 2012, and 10-K 2011.

The road ahead "to be even better"
FedEx believes that global GDP could grow at a decent rate of 2.7% in 2014 and 3.1% in 2015, while the U.S. economy would expand by 2.2% in 2014 and 3.1% in 2015. This could drive FedEx's package volumes.

Despite these improvements, geopolitical pressure in different emerging markets and fluctuating energy prices might have a bearing on logistic companies like FedEx. CFO Alan Graf threw a word of caution: "It used to be that international trade was a multiple of GDP, and those days have passed." As a measure, the company is tightening control over costs, rightsizing capacity, reorganizing the Express segment, and restructuring its network.

FedEx's growth is expected to mainly come from the Ground segment with online sales driving volumes. FTI Consulting forecasts that online retail sales in the U.S. could nearly double from $260 billion in 2013 to $508 billion in 2020. The company is expanding its fleet to develop its Ground network, and is scheduled to take deliveries in the current fiscal year. Apart from this, the recently announced 'dimensional weight' pricing will push up the Ground segment's performance.


FedEx fleet, Source: Flikr.

FedEx has found a solution to a recurring problem, weighing down revenue. In May, it announced that Ground delivery charges would be revised effective January 2015, wherein charges won't depend on package weight alone, but size as well. The very next month, UPS made a similar announcement. Though the decision may affect volumes, but that could be compensated by higher revenue per package and better utilization of cargo space.

In fiscal year 2015, the company expects to earn $8.50-$9.00 a share, excluding fuel impact, but including an estimated gain of $0.45 through a share repurchase. FedEx aims to add $1.6 billion to the operating profit of its Express business in fiscal year 2016 over what it recorded in 2013.

Foolish bottom line
FedEx has shown resilience in the face of difficult weather. A better trade environment, a strong Ground segment, revised pricing policies, and significant cost-cutting programs are good signs for FedEx's future earnings prospects. The icing on the cake for investors is that the company has repurchased 9.9 million shares and increased its quarterly dividend by 33%.There is good reason to believe that FedEx is striving toward maximizing shareholders' value.

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