Please ensure Javascript is enabled for purposes of website accessibility

FedEx Corporation Earnings Disappoint. What Went Wrong?

By Lee Samaha - Sep 16, 2015 at 1:38PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The package delivery giant wasn't able to match up to analyst earnings estimates in its first quarter. Here's a closer look at the earnings report.

When the global economy sneezes, it's highly likely that package delivery companies like FedEx (FDX 3.91%) and United Parcel Service will catch a cold. As a consequence, it's hardly surprising that FedEx's first-quarter results disappointed the market. Essentially, the company missed analyst earnings estimates and downgraded its EPS guidance for fiscal 2016 -- and don't forget that this is only the first quarter. Time to take a closer look at the earnings report.

FedEx's first quarter
The numbers:

  • First-quarter revenue of $12.3 billion compared to analyst estimates for $12.3 billion
  • First-quarter EPS of $2.42 compared to analyst estimates for $2.46

Now the guidance:

  • Full-year 2016 EPS in the range of $10.40 to $10.90 compared to previous guidance of $10.60 to $11.10 and analyst estimates for $10.82

In a nutshell, FedEx missed EPS estimates by $0.04 in the quarter, and the fact that the full-year 2016 guidance range was lowered by $0.20 (at the top and bottom ends) indicates that management is less optimistic on future conditions. As you can see above, the midpoint of the new full-year guidance is $10.65, a figure below the analyst consensus of $10.82.

What went wrong?
In July, FedEx's chief rival, UPS, managed to beat estimates with its second-quarter earnings. However, if you thought that UPS' earnings signaled an improving economic backdrop, then you would be wrong. In fact, UPS management talked of a slower U.S. economy and discussed weakness in its industrial end markets in the quarter.

For reference, UPS beat estimates largely because of company-specific strength in the international package (particularly Europe) and supply chain and freight segments.

Fast-forward to FedEx's earnings release, where Chairman Fred Smith described how "FedEx Corp. is performing solidly given weaker-than-expected economic conditions, especially in manufacturing and global trade." In a nutshell, the weakening backdrop that UPS flagged in July is confirmed in FedEx's latest figures.

Granular detail
Digging into the specifics of why guidance was lowered, CFO Alan Graf gave three reasons:

  • Weaker less-than-truckload (LTL) industry demand
  • Higher-than-expected self-insurance reserves
  • Higher operating costs at FedEx Ground

In fact, average daily LTL shipments declined 1% in the quarter, with UPS citing "weak industry demand." Moreover, revenue per LTL shipment fell by 1% in the quarter as lower fuel surcharges (energy prices have fallen) proved a drag on growth. All of which leads to FedEx freight segment revenue being flat at around $1.6 billion, with operating income declining 21% in the quarter to $132 million.

Turning to FedEx Ground, despite positive impacts of higher dimensional weight charges and increased rates -- which helped FedEx Ground yield increase 11% in the quarter -- overall operating margin decreased from 18.4% in last year's first quarter to 14% this year. The reason? The aforementioned self-insurance reserves and increase in operating costs as well as the inclusion of GENCO, a third-party logistics company acquired in January. Ultimately, FedEx Ground operating income fell 1% in the quarter to $537 million.

FedEx Express saw the continued benefits of the company's profit improvement program -- a plan to cut annual costs by $1.7 billion by the end of fiscal 2016 -- as operating margin increased to 8.3% in the quarter from 5.5% the previous year. Operating income increased 45% to $545 million in the quarter, even though revenue actually fell 4% to $6.59 billion.

The takeaway
All told, FedEx wasn't able to follow UPS in outperforming expectations due to internal performance. That said, FedEx's first-quarter results contained more of the difficult summer period -- something for UPS investors to consider before its next results. FedEx's ongoing cost-cutting is impressive, as seen in the FedEx Express segment results, but clearly the market is expecting a bit more in order to take the stock higher.

Ultimately, the earnings and commentary confirmed a weakening macroeconomic environment -- a narrative that could become a familiar refrain in the forthcoming earnings season.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

FedEx Corporation Stock Quote
FedEx Corporation
FDX
$212.29 (3.91%) $7.98

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
332%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.