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FedEx Sees Growth Ahead

By Lee Samaha - Dec 22, 2017 at 8:24AM

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The package delivery company released a good set of second-quarter earnings and is well placed going into 2018.

FedEx (FDX -1.37%) has had a good year, and the package delivery company's recent second-quarter 2018 results served notice that its strategic plans are on track. In addition, FedEx would be a major beneficiary of President Donald Trump's planned Tax Cuts and Jobs Act of 2017 -- management intimated that its earnings would get a boost -- and the expected increase in GDP growth will likely lead to the company boosting capital spending and hiring. There's a lot of new news in FedEx's earnings report, so let's take a closer look at what happened.

FedEx second-quarter earnings: The raw numbers

As you can see, each major segment expanded operating income margin and grew income more than revenue.

FedEx Segment

Revenue

Growth

Adjusted Operating Income

Growth

Margin

Change (in basis points)

Express

$9.3 billion

8.2%

$813 million

10.8%

8.7%

20

Ground

$4.9 billion

11.5%

$521 million

12%

10.6%

10

Freight

$1.7 billion

10.3%

$118 million

34.1%

6.7%

120

Total

$16.3 billion

9%

$1.38 billion

12.2%

8.5%

30

Data source: FedEx Corporation presentations. 100 basis points = 1%.

In addition, the numbers help highlight some key positives from the quarter:

  • Express now includes the acquired TNT Express operations, and the $813 million improvement comes despite a $100 million hit from the impact of the NotPetya cyberattack on TNT -- the company took a $300 million hit in the previous quarter. 
  • Freight's return to form comes as management's initiatives to improve revenue are tied to an improvement in end markets.
  • The margin improvement at ground is notable as FedEx and United Parcel Service have both been struggling to maintain margin in the face of rising business-to-consumer e-commerce demand.

Regarding ground margin, FedEx managed to achieve a 7.1% increase in average daily package volume in the quarter despite a 5% increase in yield (revenue per package). In other words, the increase in prices hasn't caused demand to drop off. This suggests that FedEx's efforts to increase pricing in order to expand margin (without hurting volume growth) are starting to work. CFO Alan Graf maintained that work on restraining costs in the ground segment was ongoing.

Margin change at UPS U.S. domestic package segment and Fedex ground segment

Data source: FedEx Corporation and United Parcel Service presentations. FedEx numbers are adjusted to nearest UPS quarter.

Guidance and the effects of the tax plan

Having reduced guidance earlier in the year due to the cyberattack at TNT Express, CFO Alan Graf promptly increased it on the back of a strong set of earnings. Full-year diluted EPS before year-end pension adjustments is now forecast to be in the range of $11.45 to $12.05 compared to the previous range of $11.05 to $11.85.

Moreover, if Trump's tax bill passes, the positive impact on FedEx would potentially be seen in three ways. First, Graf said,"We estimate our earnings per share could increase by $4.40 to $5.50 per diluted share for FY '18 before mark-to-market year-end pension accounting adjustments, primarily due to the revaluation of our net deferred tax liabilities."

A FedEx hybrid truck driving through a tunnel.

Image source: FedEx.

Second, Graf said that "U.S. GDP could increase materially next year as a result of U.S. tax reform," and that that would boost revenue at FedEx and UPS.

Third, FedEx "would likely increase capital expenditures and hiring to accommodate the additional volumes triggered from this incremental GDP growth," according to Graf.

While there was no change to the full-year capital spending forecast of $5.9 billion, it's clear that management is willing to increase it in light of the tax bill's potential passing.

TNT Express and peak season

There was also good news for FedEx's plans to integrate TNT Express with the affirmation of the target to improve operating income by $1.2 billion to $1.5 billion between 2017 and 2020.

Meanwhile, regarding FedEx's performance during peak season so far, Chief Marketing and Communications Officer Rajesh Subramaniam said, "[W]e are proud of the terrific service we have provided even on some of the busiest days in the history of FedEx."

Looking ahead

FedEx's good year continued in its fiscal second-quarter 2018, and investors can look forward to further improvements. TNT is on track and FedEx seems to be turning the corner with regard to ground margin. Meanwhile, the expected boost to growth from the tax bill will surely drop into the bottom line for package delivery companies.

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Stocks Mentioned

FedEx Corporation Stock Quote
FedEx Corporation
FDX
$223.61 (-1.37%) $-3.10
United Parcel Service, Inc. Stock Quote
United Parcel Service, Inc.
UPS
$184.99 (1.34%) $2.45

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