FedEx Corporation (FDX) – the leader in global express delivery services – has reported its first-quarter fiscal 2015 financial results.
Quarterly adjusted earnings of $2.10 per share steered ahead of the Zacks Consensus Estimate of $1.95 and fared significantly better than the year-ago adjusted number of $1.53 per share. Growth came primarily on the back of solid financial results at FedEx Ground, volume and revenue growth at FedEx Freight and a rise in U.S. domestic volume at FedEx Express.
Total revenue during the first quarter grossed $11.7 billion, higher than $11 billion reported in the first quarter of fiscal 2014. The top line also beat the Zacks Consensus Estimate of $11.4 billion.
Operating income improved 24% year over year to $987 million in the quarter, resulting in an operating margin of 8.5%, up 130 basis points (bps) from 7.2% in the year-ago period. The growth was driven by higher volumes and improved yields at three segments.
Segment Performance
Quarterly revenues of FedEx Express were $6.86 billion, up 4% year over year driven by higher volume in U.S. domestic package and growth in international export package yields offset by lower freight revenue.
U.S.domestic package volume grew 5%, given higher overnight and deferred box volume. U.S. domestic yield increased 1% owing to higher fuel surcharges, changes in service mix and increased rates. FedEx International Priority volume inched up 1%, while revenue per package increased 3% due to fuel surcharges, higher rates and weight per package.
Operating income was up 35% year over year to $369.0 million in the first quarter, resulting in an operating margin of 5.4%, up 130 bps from 4.1% in the year-ago period. Operating results were positively impacted by higher U.S. domestic package volume, improved international export yield and profit improvement programs nullifying the negative effects of higher aircraft maintenance expense and lower freight revenues.
FedEx Groundrevenues increased 8% year over year to $2.96 billion in the first quarter. Operating income was up 13% year over year to $545 million due to rise in volume and revenue per package. However, operating margin increased 70 bps to 17.5% owing to cost escalation.
FedEx Ground average daily package volume grew 6% year over year driven by e-commerce services. Revenue per package increased 3% given rate hikes and higher residential surcharges offsetting lower fuel surcharges. FedEx SmartPost average daily volume decreased 10% year over year. Revenue per package increased 10% due to higher rates.
FedEx Freightrevenues were up 13% year over year to $1.61 billion in the reported quarter, reflecting a rise of 11% in LTL (less-than-truckload) average daily shipment. Yield was up 3% year over year. The segment recorded operating income of $168 million, a rise of 70% from $99 million in the year-ago quarter, backed by higher volumes, average weight per shipment, and increased operational efficiencies. Operating margin was 10.4%, up 340 bps from the year-ago quarter.
FedEx Servicesrevenues were $374.0 million in the first quarter, flat year over year.
Liquidity
FedEx exited first-quarter fiscal 2015 with cash and cash equivalents of $2.4 billion compared with $2.9 billion at the end of fiscal 2014. Long-term debt was $4.7 billion, flat compared to fiscal 2014. Capital expenditure amounted to $720 billion at the end of first quarter compared to $3.5 billion in fiscal 2014.
Share Repurchase
During the first quarter, the company bought back 5.3 million shares, completing its existing share repurchase authorisation.
Guidance
For fiscal 2015, FedEx reiterated earnings estimates in the range of $8.50 to $9.00 per share. Capital spending estimates have been retained at $4.2 billion.
Our Analysis
We expect FedEx to continue witnessing earnings momentum and enjoy growth owing to its long-term expansion opportunities. The company is concentrating on network realignment to match the current demand level, improving its performance and gaining 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 #2 (Buy). Another better-ranked stock in this sector is Air Transport Services Group, Inc.(ATSG), which holds a Zacks Rank #2 (Buy).
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