Winter Disrupts FedEx Q3 Earnings
FedEx Corporation (FDX) – the leader in global express delivery services – reported third-quarter fiscal 2014 results.
Quarterly adjusted earnings of $1.23 per share missed the Zacks Consensus Estimate of $1.52 and remained flat compared with the year-ago quarter’s adjusted earnings. The company’s quarterly earnings were affected by the harsh winter weather that eventually brought down volumes and increased cost.
Total revenue for the third quarter was $11.3 billion, 3% higher than $11 billion in the third quarter of fiscal 2013 but slightly below the Zacks Consensus Estimate of $11.4 billion.
Operating income was up 9% year over year to $641.0 million in the third quarter, resulting in an operating margin of 5.7%, up 30 basis points (bps) from 5.4% in the year-ago quarter. The improvement, aided by the impact of one additional operating day compared with the year-ago quarter, offset the negative impacts of the severe winter weather and fuel cost.
Segment Results
Quarterly revenues of FedEx Express were $6.67 billion, down from $6.70 billion in the year-ago quarter. The revenue decline was due to lower express freight revenues and lower fuel charges along with winter calamity.
Operating income was up 14% year over year to $135.0 million in the third quarter, resulting in an operating margin of 2.0%, up 20 bps from 1.8% in the year-ago quarter. Apart from one additional operating day, the improvement was also aided by higher base package yields, reduced pension expense and ongoing cost reduction activities.
The FedEx International Priority average daily package volume decreased 5% year over year and revenue per package (yield) increased 1%.
FedEx Ground revenues increased 10% year over year to $3.03 billion in the third quarter. Operating income was up 2% year over year to $477 million due to rise in volume and revenue per package but operating margin decreased 130 bps to 15.7% owing to cost escalation.
FedEx Ground average daily package volume grew 8% year over year driven by commercial business, business-to-business and FedEx Home Delivery services. Revenue per package increased 1% given rate hikes and higher residential surcharges. FedEx SmartPost average daily volume rose 2% year over year. Revenue per package increased 3% due to higher rates.
FedEx Freight revenues were up 9% year over year to $1.35 billion in the third quarter, reflecting a rise of 7% in LTL (less-than-truckload) average daily shipment. Yield was down 2% year over year. The segment recorded operating income of $29 million, a steep rise from $4 million in the year-ago quarter, backed by higher volumes, average weight per shipment, and increased utilization of rail in the Economy service offering. Operating margin was 2.2%, up 190 bps from the year-ago quarter.
FedEx Services revenues fell to $368 million in the third quarter from $380 million in the year-ago quarter.
Liquidity
FedEx exited the third quarter of fiscal 2014 with cash and cash equivalents of $3 billion compared with $4.9 billion at the end of third-quarter fiscal 2013. Long-term debt was $4.7 billion, up from 2.7 billion in the fiscal 2013. Capital expenditure amounted to $2.5 billion at the end of third quarter.
Guidance
For fourth-quarter 2014, FedEx expects earnings in the range of $2.25–$2.50 per share. For the full year, the company expects earnings in the range of $6.55–$6.80 per share. The company’s capital expenditure guidance is lowered to $3.8 billion from the previous forecast of $4 billion.
Our Analysis
We expect FedEx to witness earnings momentum and enjoy growth from its long-term expansion opportunities. The company is concentrating on network realignment to match the current demand level and improving its performance.
FedEx also aims to spread its services across the U.S., Canada and Mexico and capitalize on potential business opportunities in the NAFTA (North American Free Trade Agreement) market for a competitive advantage over the likes of United Parcel Service, Inc. (UPS), and Radiant Logistics, Inc. (RLGT).
Nevertheless, the effects of a sluggish economic environment have clouded the near-term outlook of the company. Further, competitive threats, legal hassles, unionized workforce and pension headwinds could limit the upside potential of the stock.
Zacks Rank and Other Stocks
Currently, FedEx carries a Zacks Rank #3 (Hold). A better-ranked stock in this sector is Avianca Holdings S.A. (AVH), which holds a Zacks Rank #1 (Strong Buy).
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