FedEx Corporation (FDX) rose sharply by 6% on Wednesday, this rally was on a strong fourth quarter 2014 results. Result has surpassed the company’s guidance as well as analyst’s estimate. In this article I will discuss about the company’s performance along with reasons for strong growth of FedEx. The article will also discuss how the management would achieve the forecast of $8.50 to $9.0 earnings per share for FY2015.
Financial Performance Surpassed Estimates
Revenue for fourth quarter 2014 increased by 3.4% y-o-y to $11.8 billion exceeding the consensus estimate of $11.66 billion. With current operating income of $1.18 billion, the company has an operating margin of 10%. Profit also increased to $730 million and this resulted in earnings per share to $2.46, exceeding consensus estimates of $2.36 per share for 4Q14.
FedEx Express segment’s performance was not very impressive. The slight increase in revenue from $6.98 billion in 4Q13 to $7.0 billion in 4Q14 was primarily due to 2% higher package volume and higher package yield.
But what is encouraging is an increase in U.S domestic average daily volumes by 3% during the same period. This suggests that the demand for the segment has been increasing gradually on economic recovery.
Moreover, acquisition of Supaswift business in South Africa along with six other countries like Botswana, Malawi and Zambia, would further have a positive impact on the company’s growth in this segment. Access to these developing regions would provide huge opportunities to both local and international customers to access new market.
Growth in e-commerce had a considerable impact on the company’s ground segment. It has resulted in 8% increase in the average daily volume of the FedEx ground segment for fourth quarter 2014. The increase was also supported by an increase in rates and higher residential surcharges.
However, FedEx freight segment was the most profitable with 12% increase in revenue over the last year. This increase was due to a 14% increase in priority service along with 12% increase in less than truckload (LTL) average daily shipment.
Capital Expenditure Plans and Industry Outlook
Investment in fleet modernization would reduce operating cost globally and hence would have significant impact on growth. For the same reason, the company has an estimated capital expenditure of $4.2 billion for fiscal 2015. These investments would boost the timely delivery and development of planned aircraft.
Modernization of fleet is also estimated to reduce trip cost by 20% and 30% for B757 and B767, respectively. Reduced operating cost would thus help to improve the operating margin to 10% by 2016 as estimated by the company.
The company’s 2015 outlook also looks impressive with improving economic conditions. Global GDP growth for 2015 is estimated to be 3.1%. This would have a considerable impact on trade growth as well. Historically, trade growth has been rarely slower than GDP growth. This in turn would increase the demand for freight services.
With improving economic conditions, FedEx expects the diluted EPS for 2015 to be in the range of $8.5-$9.0. Therefore, the earnings growth expectation is strong for 2015 and this should help the current rally to sustain.
For fourth quarter 2014 the share repurchase plans has resulted in $0.12 increase in earnings per share. The company plans to buy back 5.3 million shares in fiscal 2015 and this would further increase the shareholder value by boosting the EPS. I am of the opinion that this stock will continue to outperform by with strong growth and cost cutting plans and would strongly recommend this stock as a good investment opportunity.