FedEx Earnings: Is the Amazon-USPS Deal a Bigger Threat Than UPS?

FedEx (FDX 0.11%) will release its quarterly report on Wednesday, and investors have been quite pleased with the prospects for the express-delivery carrier, sending shares to all-time record highs in the past month. Yet given how important online retail giant Amazon.com (AMZN -1.14%) has become to shipping companies across the planet, will its deal with the U.S. Postal Service to offer Sunday delivery for its deliveries hurt FedEx even as it fights to beat out rival United Parcel Service (UPS 0.34%) in grabbing up a bigger share of the online-delivery market?

Investors see FedEx as more than just a delivery company. Rather, its results directly correlate with the health of the global economy, as increased business activity generally leads to companies shipping more goods from place to place in order to meet higher demand. What makes Amazon's USPS partnership a threat is that even if Amazon's sales do keep rising, FedEx might not see all of the benefit of those gains, and may even lose market share in this key niche. Let's take an early look at what's been happening with FedEx over the past quarter and what we're likely to see in its report.

Stats on FedEx

Source: Yahoo! Finance.

Can FedEx's earnings growth top United Parcel Service's this quarter?
In recent months, analysts have gotten more upbeat about FedEx earnings, raising their November-quarter estimates by a penny per share and their full-year fiscal 2014 and 2015 projections by $0.05 and $0.21 per share respectively. The stock has climbed as well, rising 27% since mid-September.

Source: Wikimedia Commons, courtesy EyOne.

FedEx brought positive momentum into the quarter after its August-quarter report, with revenue rising just 2% but earnings climbing by 5.5% from the previous year. Most of the company's strength came from its ground division, with 11% greater sales as customers shifted to lower-cost, slower-speed options as alternatives to FedEx's trademark express service. FedEx Express, in contrast, saw a small decline in revenue, although greater efficiency actually led to a greater percentage gain in operating profit. That's consistent with trends at UPS, which has also seen a shift to slower, cheaper shipping methods in its business mix.

Pricing power has been a big factor helping FedEx. As global economic conditions improve, FedEx has been able to boost rates, with increases for its freight division having taken effect mid-year and rising rates for the express, ground, home delivery, and SmartPost services starting near the beginning of 2014. Moreover, even though FedEx has reduced its forecasts for GDP growth in the U.S. and worldwide, anticipated cost savings of $1.6 billion in the next two to three years could help earnings climb even if revenue stays flat or contracts slightly.

The holiday season will be key for FedEx, and that's potentially where Amazon's USPS partnership could eventually cause problems. FedEx predicted increased holiday shipping from previous years, with a 13% rise expected in the key first week of December. With USPS now delivering on Sunday, the question is whether FedEx and UPS will follow suit with their own services in order to keep market share. Doing so would involve extra upfront costs that would challenge efficiency gains, but not doing so creates a prisoner's dilemma: If UPS decides to offer Sunday service and FedEx doesn't, it could cause big problems for FedEx and its key customers.

In the FedEx earnings report, watch to see how the company positions itself for 2014. With the global economy at an inflection point, FedEx's results will provide a key data point for investors to assess the state of the shipping business worldwide.

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