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Explaining the Logistics Behind FedEx Corporation's 19% Surge in March

By Sean Williams - Apr 4, 2016 at 2:40PM

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FedEx delivers one heck of a surprising quarter for Wall Street and its shareholders.

Image source: FedEx. 

What: Shares of FedEx Corporation (FDX 0.93%), one of the world's largest providers of transportation logistics and business services, catapulted 19% higher in March based on data provided by S&P Global Market Intelligence. The reason behind FedEx's strong mid-month move boils squarely down to its third-quarter earnings results.

So what: For the quarter, FedEx reported an adjusted profit of $2.51 per share, up 24% from Q3 2015, and revenue of $12.7 billion, or a nearly 9% increase from the prior-year period. By comparison, Wall Street was looking for just $2.34 in Q3 EPS and revenue growth of closer to 6%.

CEO Frederick Smith credited his company's broad portfolio of business solutions for the solid quarter, but a quick analysis by investors suggests Q3 was all about growth in FedEx's express shipping segment. Although revenue dropped 1% year over year in express shipping, operating margins rose 320 basis points to 9.1%, boosting operating income by 51% to $595 million. Lower fuel costs and cost-saving initiatives provided a big boost.

Image source: FedEx.

FedEx ground shipping was almost the exact opposite. Revenue surged 30%, but operating income dropped by less than 1%, hurt primarily by spending to expand its ground network.

Freight, which is by far FedEx's smallest biggest segment, delivered a 1% revenue gain year over year, but weakening margins as labor costs outpaced volume growth.

Finally, FedEx introduced an outlook that's suggestive of continued growth. It tightened its forecast for the remainder of fiscal 2016 to a range of $10.70-$10.90 in full-year EPS (prior forecast was $10.40-$10.90), and CFO Alan B. Graf, Jr. noted in the press release that the company's "positive financial momentum should continue into our upcoming fiscal 2017, where we expect to report solid growth in earnings and cash flow." 

Now what: Going into this quarterly report there were two substantive warning signs for investors.

Some investors had been mightily concerned about what effect (AMZN 0.25%) could have on the logistics industry. As Amazon has grown, it's expanded its logistics network to include air-cargo and (eventually) drones, mainly out of necessity to keep its customers happy and help manage its incredible size. However, Amazon's primary focus is certainly not logistics. What we learned from FedEx's quarterly report is that its shareholders have little to fear from Amazon when it comes to logistics disruption.

Additionally, investors had been worried by recent less-than-truckload volumes. But, FedEx's performance received a real boost as cost-reduction programs and lower fuel costs kicked in and helped boost operating margins in a big way for its express shipping segment.

After proving its skeptics wrong, FedEx appears as if it has the potential to head even higher. With Amazon not considered a major threat and the company's CFO calling for strong earnings and cash flow growth in 2017, FedEx's PEG ratio of 1.2 could imply a still reasonably valued business worth a closer look.

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