Please ensure Javascript is enabled for purposes of website accessibility

Why FedEx Surges on Strong Holiday Results

By Lee Samaha - Mar 17, 2016 at 1:20PM

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 pleased investors with a strong set of results. How and Why?

Following a strong set of results from rival United Parcel Service, Inc (UPS 1.34%), FedEx Corporation (FDX -1.37%) too reported standout results for the quarter that included the holiday season. Moreover, FedEx management emboldened investors by predicting earnings would come in toward the high end of its full-year guidance range amid impressive margin improvement in its key express segment. Let's take a closer look at the numbers and what they mean.


FedEx Corporation's third quarter: The raw numbers
The figures need explaining because there are a lot of moving parts. 

Before getting into segmented detail, it should be noted that FedEx had $344 million in "corporate eliminations and other" involving $273 million for legal matters and $23 million in expenses related to TNT Express. Since these expenses are likely to be non-recurring it's better to focus on segment performance.

  Revenue growth Operating Income growth
Express 6,557 (1.5%) 595 51%
Ground 4,408 29.9% 557 0.4%
Freight 1,447 1.3% 56 (16.4%)
Total 12,654 8% 864 (16.7%)


UPS's fourth-quarter results, delivered in February, saw double-digit volume growth in its more expensive air deliveries  -- something that could indicate a shift in customer preference that would benefit FedEx's express segment. This proved to be the case in FedEx's third-quarter results, but perhaps not in the way that many envisaged.

As you can see above, the express segment generated a whopping 51% increase in operating income despite revenue falling, with express operating margin at 9.1% compared to 5.9% in the same period last year. How did FedEx do this?

Management cited three reasons:

  • Improved yield management
  • U.S. domestic volume growth counteracting soft international growth
  • Ongoing benefits from its profit improvement program

As with UPS, FedEx has been making initiatives to improve yields by using pricing initiatives in order to maximize profitability of increasing volumes in e-commerce deliveries. Clearly the initiatives are working for both companies. Similarly, domestic volume increases mirror what UPS reported concerning the peak demand period in the U.S. On a stock specific note, FedEx's profit improvement program continues to lead to margin expansion in the express segment.

Ground segment
While express saw margin expansion on lower revenue, it was quite the opposite at ground -- operating income margin declined to 12.6% from 16.5%, or 390 basis points in last year's third-quarter, even as revenue increased 29.9%.

 Management outlined five causes on the earnings call:

  • 190 basis points of the decline is due to reporting SmartPost revenue on a gross basis rather than net, and due to the inclusion of results from its May 2015 acquisition of third-party logistics provider GENCO.
  • 60 basis points due to higher costs "higher cost driven significantly by peak season demand that exceeded both volume and package size expectations," according to CFO Alan Graf.
  • 60 basis points due to higher self-insurance reserves.
  • 30 basis points due to purchased transportation costs.
  • 30 basis points for network expansion.

On a more positive note, Graf expects ground to return to "mid-teens margins in the fourth quarter" so many of these issues look temporary. However, he also outlined FedEx's intent to spend additional capital to expand capacity for e-commerce growth. Indeed, e-commerce growth is proving an opportunity and a challenge for FedEx and UPS particularly during peak demand periods.

Freight segment
Graf described the Less-Than-Truckload (LTL) market as being "very challenging," and in common with under transportation companies such as J.B. Hunt Transport Services (JBHT 1.52%) Graf cited the negative impact of lower fuel surcharges.

Graf also disclosed how inefficient packaging was causing lower weight per shipment, and how FedEx would be installing additional dimensional scanners -- which help cost shipments -- and should improve productivity in future.

Looking ahead
Following a successful third-quarter, management updated its full-year diluted EPS guidance range to $10.70 - $10.90 compared to a previous range of $10.40 to $10.90, with adjusted earnings expected to be up 20% to 22% in 2016.

All told, it was a good report, especially as the peak season has produced some negative surprises for FedEx and UPS in recent years. Investors warmed to the positive outlook on the ground segment, while ongoing execution at express continues to impress.

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

J.B. Hunt Transport Services, Inc. Stock Quote
J.B. Hunt Transport Services, Inc.
$159.87 (1.52%) $2.40
United Parcel Service, Inc. Stock Quote
United Parcel Service, Inc.
$184.99 (1.34%) $2.45
FedEx Corporation Stock Quote
FedEx Corporation
$223.61 (-1.37%) $-3.10

*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 analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

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.