FedEx (FDX 1.37%) crushed expectations when it reported record revenue for the first-quarter fiscal year 2021 (Q1FY21) -- sending shares of FedEx and United Parcel Service (UPS 0.02%) to new 52-week highs on Wednesday. The transportation industry continues to be one of the best-performing subcategories of the industrial sector, with UPS and FedEx leading the charge higher.
Let's break down FedEx's report to see if there's more room to run or if investors should take some profits here.
Image source: Getty Images.
Residential boom
Similar to UPS's blowout quarter in late July, a surge in residential deliveries is boosting FedEx's top-line growth. This surge isn't all that surprising given the boom in e-commerce as a result of the COVID-19 pandemic, as illustrated when FedEx reported that U.S. residential volume comprised 72% of total U.S. domestic volume in the fourth quarter of FY20, up from 56% in Q4FY19. What is surprising is that FedEx and UPS posted impressive profit margins, so that earnings per share (EPS) is higher now than it was a year ago despite the fall in business to business (B2B) sales. This is particularly surprising considering that residential deliveries tend to have higher volume and lower margins than B2B sales.
UPS grew its U.S. business to consumer (B2C) sales over 65% year over year in the second quarter of 2020 and reported a record 22.8% increase in daily volume. FedEx reported its highest quarterly revenue on record, mostly due to a 36% increase in FedEx ground revenue.
|
Express Revenue |
Express Operating Margin |
Ground Revenue |
Ground Operating Margin |
Freight Revenue |
Freight Operating Margin |
|
|---|---|---|---|---|---|---|
|
Q1 FY21 |
$9.65 billion |
7.4% |
$7.04 billion |
11.8% |
$1.83 billion |
15% |
|
Q1 FY20 |
$8.95 billion |
3.2% |
$5.18 billion |
12.4% |
$1.91 billion |
10.2% |
Data source: FedEx Corporation
FedEx Express and FedEx Ground are primarily responsible for residential deliveries. FedEx notes that it's gaining a competitive advantage in residential deliveries thanks to its decision to expand its ground services to Sundays and expand residential package services with quicker overall transit times via Express and Ground.
A blowout quarter
FedEx's quarter was truly nothing short of a blowout. Record revenue and high margins across the board gave FedEx its strongest quarter from a margin and net income perspective since Q4FY19.
|
Non-GAAP Results |
Q1 FY21 |
Q4 FY20 |
Q3 FY20 |
Q2 FY20 |
Q1 FY20 |
Q4 FY19 |
Q3 FY19 |
Q2 FY19 |
Q1 FY19 |
|---|---|---|---|---|---|---|---|---|---|
|
Diluted EPS |
$4.87 |
$2.53 |
$1.41 |
$2.51 |
$3.05 |
$5.01 |
$3.03 |
$4.03 |
$3.46 |
|
Revenue |
$19.3 billion |
$17.4 billion |
$17.5 billion |
$17.3 billion |
$17.0 billion |
$17.8 billion |
$17.0 billion |
$17.8 billion |
$17.1 billion |
|
Operating margin |
8.50% |
5.20% |
2.80% |
3.90% |
6.10% |
9.60% |
5.80% |
7.50% |
7.00% |
Data source: FedEx Corporation
Despite two blowout quarters in a row, the company is refraining from offering guidance for fiscal year 2021. Same with UPS. This can be a bit disconcerting for investors looking to buy either stock at a 52-week high. Judging from comments by FedEx and UPS, their lack of guidance is really more of a precaution due to the uncertainty surrounding the long-term consequences of the pandemic on consumer spending.
Where to go from here
FedEx's latest earnings report is nothing short of spectacular. It's the second consecutive report where all of its business segments reported impressive numbers. UPS is in a similar boat, having reported fantastic numbers for its second quarter. UPS's third-quarter 2020 report in late October provides the next opportunity to gauge these two transportation giants.
Unlike other industries where competitors report within days of each other, the earnings schedule of UPS and FedEx has an advantage in that investors get a reading of the industry every month and a half instead of every three months. Of course, there are many differences between FedEx and UPS, but both stocks have been surging for the same reason: E-commerce.
When UPS and FedEx were up 30% in the past month, I cited the classic Foolish principle of "Let your winners run. High." That principle applies well to companies whose stocks increase in value for the right reasons, such as surging growth or strong fundamentals. In the case of UPS and FedEx, the numbers speak for themselves. Until the fundamentals change, both companies deserve a place in any portfolio.
Even if the growth slows, UPS yields 2.5% and has increased its dividend by five-fold over the past 20 years. FedEx yields 1.1% but has increased its dividend at a five-year compound annual growth rate (CAGR) of 26%. Rising dividend distributions mean UPS and FedEx provide an extra incentive for you to hold their stocks over the long term.
