FedEx Corporation’s FDX second-quarter fiscal 2016 (ended Nov 30, 2015) earnings per share (on an adjusted basis) of $2.58 beat the Zacks Consensus Estimate of $2.51. A strong holiday season owing to the e-commerce boom drove the earnings beat. Earnings also increased 19.4% year over year. A lower tax rate also boosted earnings. Including special items, earnings climbed 5.6% to $2.44 per share.
The earnings beat naturally pleased investors. Consequently, the stock gained in after-market trading on Dec 16.
Quarterly revenues climbed 5% year over year to $12.5 billion, edging past the Zacks Consensus Estimate of $12.4 billion. Apart from higher volumes in online shopping, reduced costs at the package deliverer's express-delivery business also contributed to the strong quarterly performance.
Operating income (on an adjusted basis) improved 17.6% year over year to $1. 20 billion in the quarter. This resulted in an operating margin of 9.6%, up 100 basis points (bps) from the year-ago period. Higher base rates contributed to the improvement in operating results. The company repurchased 6 million shares during the quarter under review.
Segmental Performance
Quarterly revenues of FedEx Express totaled $6.59 billion, down 6% year over year. Results were hurt by lower fuel surcharges and unfavorable currency exchange rates.
U.S. domestic package volume grew 1%. Growth in overnight packages led to the improvement. Reduced fuel surcharges contributed to the 2% decline in U.S. domestic revenue per package. FedEx International Economy volume climbed 3%, while FedEx International Priority volume declined 5%. International export revenue per package decreased 9% due to lower fuel surcharges and adverse foreign currency movements.
Operating income was up 26% year over year to $622 million in the reported quarter, resulting in an operating margin of 9.4%, up 240 bps from the year-ago period. Operating expenses declined 9%.
Operating results were positively impacted by higher base rates apart from the benefits emanating from profit improvement program initiatives.
FedEx Ground revenues increased 32% year over year to $4.05 billion in the second quarter. Quarterly revenues were driven by the inclusion of results of the erstwhile GENCO Distribution System (acquired on Jan 30, 2015). Moreover, higher ground revenue per package and average daily volume aided segmental performance during the quarter. Operating income came in at $526 million, up 13% due to higher base rates and volume. Operating margin contracted 220 bps to 13%.
FedEx Ground average daily package volume grew 9% year over year on the back of the e-commerce boom. Ground revenue per package improved 10%, aided by the recording of FedEx SmartPost revenues on a gross basis, apart from increased rates.
FedEx Freight revenues declined 2% year over year to $1.55 billion. LTL (less-than-truckload) revenue per shipment dropped 3%, hurt by lower fuel surcharges. LTL average daily shipments improved 1%, while weight per shipment was down 1%. The segment recorded an operating income of $101 million, down 10% from the year-ago figure. Operating margin was 6.5%, down 60 bps. Segmental operating results were hurt by higher salaries and costs pertaining to employee benefits.
Guidance
FedEx maintained its earnings per share outlook for fiscal 2016, which was originally provided in Sep 2015 while disclosing the fiscal first quarter results. Management still expects earnings per share in the band of $10.40–$10.90. The Zacks Consensus Estimate of $10.52 per share is within the guidance range.
The guidance is based on the assumption of moderate economic growth and does not include the impact of the company’s impending acquisition of TNT Express TNTEY. The deal was announced in April this year. Capital expenditure is still projected at $4.6 billion for fiscal 2016.
Our Take
We are pleased by FedEx’s strong performance in the reported quarter driven by a record number of holiday shipments so far. This is particularly encouraging as conditions remain challenging due to weakness in industrial production and slow global trade. The strong holiday season performance helped FedEx rebound from a lackluster first quarter performance. Strong growth is expected by the company in the second half of fiscal 2016.
In October this year, the company had unveiled a rosy forecast pertaining to the holiday season, predicting record shipping volumes during the period. FedEx stated on the conference call that sales on its busiest days during the peak period surpassed its own expectations, resulting in the average shipment volume of packages more than doubling on a daily basis.
Moreover, the deal to buy TNT Express on materialization will significantly expand FedEx’s scale of operations, particularly in Europe. The expansion of its capabilities will enable FedEx to compete more effectively with rivals like United Parcel Service Inc. UPS that has a significant European footprint.
Zacks Rank
Currently, FedEx has a Zacks Rank #3 (Hold). A better-ranked stock in the broader transportation sector is Delta Air Lines DAL with a Zacks Rank #2 (Buy).
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