On Wednesday morning, FedEx (NYSE:FDX) reported solid earnings for the fourth quarter of its 2015 fiscal year that nonetheless fell short of analysts' expectations.
This capped a year of strong earnings growth for FedEx -- full-year adjusted EPS rose 27% year over year to $8.95. Moreover, FedEx expects to post another year of solid earnings growth in fiscal year 2016, while some recent acquisitions provide additional long-term growth opportunities.
Behind the numbers
For the fourth quarter, FedEx's revenue reached $12.1 billion, up from $11.8 billion a year earlier. FedEx's adjusted operating margin expanded slightly to 10.5%, compared to 10.3% in Q4 of the 2014 fiscal year. Adjusted EPS rose from $2.54 in Q4 2014 to $2.66 last quarter. By contrast, analysts had expected revenue of $12.3 billion and adjusted EPS of $2.69, according to Bloomberg.
The sharp slowdown in earnings growth (relative to the mid-double-digit growth posted earlier in FY15) can mostly be attributed to the vicissitudes of oil prices. FedEx spends billions of dollars on fuel every year, and it passes these costs through to customers on a two-month lag.
This means from last fall until a few months ago, while oil prices were falling dramatically, FedEx was passing through higher fuel surcharges than what it was actually paying. However, oil prices have started to rise again, so in Q4, the fuel surcharge lag was a drag on FedEx's profit growth.
Looking at the underlying results, FedEx's business still appears healthy. For FedEx Express, domestic package volume increased 2% year over year while international export volume decreased 1%. At FedEx Ground, volume rose 5% year over year, while volume was flat at FedEx Freight. Most important, pricing improved in all three segments, excluding the impact of the lower fuel surcharges.
Stability -- and change
FedEx also announced that its board has raised the mandatory retirement age for directors from 72 to 75. This is important because FedEx founder, chairman, and CEO Fred Smith will turn 71 in August. Raising the mandatory retirement age will potentially allow him to stay around a few years longer, providing management stability at FedEx.
That's particularly important since FedEx is in the midst of digesting its acquisition of GENCO, a logistics company specializing in product returns. Moreover, FedEx has agreed on a multibillion-dollar deal to buy European competitor TNT Express in a transaction expected to close next year. The acquisition will dramatically improve FedEx's network in Europe, but it will undoubtedly come with a fair share of integration challenges.
A look ahead
For the coming year, FedEx expects to continue posting solid earnings growth as it reaches the end of its multiyear profit improvement program. In connection with that program, FedEx recently announced another wave of early aircraft retirements as it updates its fleet with more modern, lower-cost aircraft.
Overall, FedEx projects that adjusted EPS will rise 18%-24% year over year in FY16 to a range of $10.60-$11.10. That's right in line with the average Wall Street earnings estimate of $10.88. Importantly, this guidance does not include any impact from the planned takeover of TNT Express.
FedEx shares dropped 3% in early trading on Wednesday as the results didn't quite live up to Mr. Market's high expectations. But if the TNT acquisition goes through, and FedEx can meet or exceed its FY16 guidance, the stock could continue to perform well going forward.
Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.