When the global economy sneezes, it's highly likely that package delivery companies like FedEx (NYSE:FDX) 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
- 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.
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.
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.