FedEx Corporation (FDX) reported fourth quarter fiscal 2012 adjusted earnings of $1.99 per share. The quarter’s earnings surpassed the Zacks Consensus Estimate of $1.92 and the year-ago earnings of $1.75. The outperformance was attributable to strong yields, remarkable performance by FedEx Ground and improvement in FedEx Freight service offerings.
Adjusted earnings exclude 26 cents per share of special items related to aircraft impairment charges under FedEx Express.
For the full year, the company reported adjusted earnings per share of $6.59, 34.5% up from adjusted earnings of $4.90 a year ago.
Total revenue for the fourth quarter climbed 4% year over year to $11 billion but missed the Zacks Consensus Estimate of $11.2 billion. For fiscal 2012, total revenue increased 8.7% year over year to $42.7 billion.
Operating income for the quarter grew 11.5% year over year to $990 million. Operating margin also showed an increase of 60 basis points (bps) to 9.0% from 8.4% in the year-ago quarter. Operating expenses rose 5% year over year to $10.2 billion.
For the full year, operating income increased 29.1% year over year to $3.28 billion. Operating margin improved 120 bps to 7.7% from 6.5% in the prior year. Operating expenses were $39.5 billion, up 7% year over year.
Segment Results
Quarterly revenues at FedEx Express were $6.80 billion, up 3% year over year. Operating income was down 3% year over year at $415 million, resulting in an operating margin of 6.1%, down 40 bps from 6.5% in the year-ago quarter.
The negative impacts of poor package volumes along with demand shift toward international services with lower profitability affected the operating income of the segment. However, these headwinds were partially offset by a fuel surcharge timing lag.
The FedEx International Priority (IP) average daily package volume dipped 3% year over year on lower Asian demand, while revenue per package (yield) grew 3% on higher fuel surcharges and package weights. The U.S. domestic revenue per package rose 6% year over year despite a 5% decline in the U.S. domestic average daily package volume. The revenue growth was primarily attributable to an increase in demand for premium FedEx First Overnight service offerings, freight rates and fuel surcharges.
FedEx Ground revenue in the fourth quarter increased 9% year over year to $2.48 billion attributable to package volume growth at FedEx Ground. Operating income upped 18% year over year to $494 million, resulting in operating margin of 20.0% compared with 18.4% in the year-ago quarter.
FedEx Ground average daily package volume increased 3% and revenue per package grew 5% on increased freight rates and higher value added services. FedEx SmartPost average daily volume expanded 16% on increased e-commerce and revenue per package rose 7%.
Fourth quarter revenues of FedEx Freight upped 7% year over year to $1.40 billion, reflecting increases of 4% in LTL (less-than-truckload) yield and 4% in average daily LTL shipments. FedEx Freight recorded an operating income of $81 million that shot up 93% from $42 million in the year-ago quarter.
Operating margin improved to 5.8% from 3.2% in the year-ago quarter. The strong performance was driven by higher operational efficiency alongside volume and yield growth.
FedEx Services revenue fell 1.4% year over year to $432 million in the fourth quarter.
Liquidity
FedEx exited fiscal 2012 with cash and cash equivalents of $2.8 billion compared with $2.3 billion at the end of fiscal 2011. Long-term debt remained at $1.3 billion compared with $1.7 billion at the end of May 31, 2011. Capital expenditures for fiscal 2012 amounted to $4.0 billion.
Guidance
FedEx has projected earnings in the range of $1.45 to $1.60 per share for the first quarter of 2013. For fiscal 2013, the company expects earnings in the range of $6.90 to $7.40 per share. In fiscal 2013, FedEx expects increase in employee expenses that includes $150 million in pension expenses. Capital expenditures are expected to be approximately $3.9 billion for 2013.
The company intends to focus more on FedEx Ground business, which continues to generate higher profitability. Additionally, it aims at lowering its investment on FedEx Express by lowering the number of aircraft deliveries.
Our Analysis
We believe FedEx is poised to benefit from improved pricing, volume growth, continued yield improvement and diminishing cost headwinds. We expect the strong performance at FedEx ground and FedEx Freight to continue supporting earnings growth for the company.
However, increased investments, competitive threats from peers like United Parcel Service (UPS), lower international demand and economic volatilities could limit the upside potential of the stock
We are currently reiterating our long-term Neutral rating on FedEx. The stock retains a Zacks #3 Rank (Hold) for the short term.
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