FedEx Corporation (FDX) – the leader in global express delivery services – reported second quarter fiscal 2014 results.
Quarterly adjusted earnings of $1.57 per share missed the Zacks Consensus Estimate of $1.65 but improved from the year-ago adjusted earnings of $1.39. Despite the challenges in the macro economy, the company delivered strong earnings year over year on the back of higher revenues at the Ground and Freight segments coupled with cost control efforts at the Express segment.
Total revenue for the second quarter was $11.4 billion, 3% higher than $11.1 billion in the second quarter of fiscal 2013 but below the Zacks Consensus Estimate of $11.5 billion.
Operating income increased 15% year over year to $827 million, resulting in an operating margin of 7.3%, up 80 basis points. The growth was driven by higher yield and cost control at FedEx Express. Total operating expenses grew 2% year over year at $10.6 billion.
Segment Results
Quarterly revenues at FedEx Express were $6.84 billion, down from $6.86 billion in the year-ago quarter. The revenue decline was due to lower express freight revenues and lower fuel charges.
Operating income was up 42% year over year at $326.0 million in the second quarter, resulting in an operating margin of 4.8%, up 140 bps from 3.4% in the year-ago quarter. The improvement was aided by lower pension expenses, higher yields and lower net expenses.
The FedEx International Priority average daily package volume decreased 5% year over year and revenue per package (yield) increased 3%.
FedEx Ground revenues increased 10% year over year to $2.85 billion in the second quarter. Operating income was up 3% year over year at $424 million but operating margin decreased 100 bps to 14.9% owing to a delayed holiday shipping season.
FedEx Ground average daily package volume grew 8% year over year driven by commercial business and business-to-business and FedEx Home Delivery services. Revenue per package increased 2% given rate hikes and higher residential surcharges. FedEx SmartPost average daily volume expanded 9% due to higher e-commerce activities. Revenue per package decreased 3% because of higher postal rates and lower fuel surcharges, which dampened the positive impact of rate increases.
FedEx Freight revenues were up 4% year over year at $1.43 billion in the second quarter, reflecting a rise of 4% in LTL (less-than-truckload) average daily shipment. Yield was down 1% year over year. The segment recorded operating income of $77 million, reflecting an increase of 1% year over year. Operating margin was 5.4%, down 10 basis points from the year-ago quarter.
FedEx Services revenues fell 3% year over year to $391.0 million in the second quarter.
Liquidity
FedEx exited the second quarter of fiscal 2014 with cash and cash equivalents of $3.9 billion compared with $2.5 billion at the end of second quarter fiscal 2013. Long-term debt was $2.7 billion, unchanged from the fiscal 2013 level. Capital expenditure amounted to $1.7 billion at the end of second quarter compared with $1.9 billion at the end of the year-ago quarter.
Share Repurchase
During the reported quarter fiscal 2014, FedEx repurchased 7.2 million shares bringing the total share buyback to 10 million shares. The company has also initiated a new share repurchase program of 32 million shares. FedEx expects the second quarter share repurchase to favorably impact earnings per share by 4 cents.
Guidance
For fiscal 2014, FedEx raised its earnings per share growth projection to 8% to 14% from 7% to 13%. The company’s capital expenditure guidance remains unchanged from the previously estimated $4 billion.
Our Analysis
We expect FedEx to register 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 improve 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), Expeditors International of Washington Inc. (EXPD) 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.
Currently, FedEx retains a Zacks Rank #2 (Buy).
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