FedEx (FDX 1.60%) announced its Q4 earnings results this morning, and the shareholder applause was deafening. On a down day for the Dow and Nasdaq alike, FedEx stock was up a tidy 1% on the day. But was the news good enough to justify the price increase?
Let's find out.
The good news
FedEx started out the day on the right note, delivering Q4 earnings of $2.13 per share, or $0.17 more than analysts had expected the company to produce. It wasn't long before the news started to turn sour, however. Quarterly revenues of $11.4 billion fell about $40 million below consensus, and company CEO Fred Smith groused that growth in the global economy remains "tepid," and his international customers are continuing to opt for "less costly international shipping services" whenever possible.
What's more, even the $2.13 that FedEx stock did deliver came covered with caveats. The company's headline "profits" were actually adjusted to exclude a "share business realignment program charge" and a "noncash aircraft impairment charge at FedEx Express." These two charges combined to cut bottom-line profits by more than half and reduce the company's per-share net to just $0.95 per share. That's down 45% from what FedEx stock earned in last year's Q4.
As a result, while Smith tried to spin the news positively at the beginning of his earnings release, boasting of "another strong year" for FedEx, and pointing to how "FedEx Freight margins continued to improve," the truth is that operating profits at the firm for fiscal Q4 2013 ended up at just 4.4% -- a 44% reduction from the level of profitability the company reported in fiscal Q4 2012.
Full-year results weren't much better. While revenues grew modestly (up 3.7% year over year), operating profit margin at the company was just 5.8%, versus 7.5% for full fiscal year 2012.
And going forward, the prospects looks bleak for FedEx stock. Management forecasts fiscal 2014 adjusted earnings growth of 7% to 13% in comparison with 2013's weak performance. However, this assumes that fuel prices behave as expected, that the U.S. economy grows at 2.3%, and that the world economy grows at 2.7%. Even under this rosy scenario, FedEx expects to earn no more than $7.04 per share -- another "adjusted" number, and even then, about 4.4% below consensus analyst estimates.
The upshot
Granted, if FedEx were netting $7.04 per share, today's price might be appropriate. But priced north of 20.7 times net earnings today, FedEx stock looks overvalued even at the top end of its projections. Meanwhile, free cash flow at the company continues to lag reported net income, and with FedEx promising to ramp capital spending back up to $4 billion annually in the current fiscal year, cash generation could be weak again this year.
