FedEx Corporation (FDX, Financial) is slated to reveal its earnings report for the third quarter for FY2015 on March 18th 2015. FedEx results are widely considered a stand-in for economic growth and tend to significantly influence the larger market gauges. The company competes with United Parcel Services Inc. (UPS, Financial) and privately held businesses such as DHL International Gmbh and TNT Express (TNTEY, Financial) in the air delivery and freight services market.
FedEx saw robust volume growth across segments during the second quarter of fiscal 2015 which, combined with the company’s profit improvement strategies, helped boost revenue to $11.9 billion, up 5% year-over-year. The company also logged 23% growth in net profits to $616 million for the quarter. However, although FedEx’s EPS grew 36% compared to the prior-year quarter to $2.14 a share, the figure missed the consensus estimate of $2.22 a share owing to higher aircraft maintenance costs and lower fuel surcharge that ate into the company’s operating profit. FedEx had reaffirmed its guidance of $8.50-9 per diluted share in earnings for the full fiscal 2015 on a projected 26-34% growth from FY2014 levels.
Re-alignment Measure Likely to Pay-off
Despite its weaker-than-expected performance in the last quarter, FedEx is expected to post upbeat results for Q3 2015. The company has taken several steps towards effective cost-optimization as well as better package handling. For instance, while FedEx invested in enhancing its network and capped retailer deliveries on the one hand, the company employed six-sided cameras for reading package labels and increased the number of seasonal workers on the other to cater to the holiday-season rush. These measures significantly improved FedEx’s delivery rates compared to the year-ago quarter. Moreover, FedEx extended the company’s dimensional weight pricing to cover all ground shipments as of Jan 1, 2015 compared to the previous limit that applied to packages measuring over three cubic feet.
While FedEx expects growing e-commerce spending to boost its ground shipments business, the signs of gradual improvement in the global economy are also expected to advance the company’s quarterly performance. However, the results could be adversely affected by negative foreign currency headwinds. Experts are also apprehensive that FedEx’s excessive re-alignment investments could mean higher operating expenses and hence lower income levels, akin to the UPS, which reported a 61% fall in net income for its fourth quarter.
Fuel Costs Could Play Spoil-sport
FedEx saw its fuel surcharge declining during the second quarter owing to the fall in fuel prices. The trend is a double-edged sword for FedEx since while on one hand a drop in fuel prices means reduced fuel bills for the company, a decline in fuel surcharge impacts its surcharge revenues. Consequently, experts opine that the continuation of the trend into the third quarter could impact FedEx’s bottom lines for the quarter.
Consequently, FedEx recently announced a revision to its fuel surcharge rate while widening the range over which the surcharge rates would remain static that would allow the company to capture higher revenues from fuel surcharge in the event of a continued decline in fuel prices. However, with the rate-change coming into effect quite late into the third quarter, FedEx is not likely to benefit much from the revision for the quarter.
Final Thoughts
Although FedEx posted weaker-than-expected second quarter earnings, the company’s efforts at cost realignment measures are likely to push revenues for the third quarter. Further, while investors are pleased with the package-delivery service’s focus on share buybacks, Credit Suisse upgraded FedEx from Neutral to Outperform and increased the price target from $177 to $203, citing the improving prospects of the company’s ground business. However, fuel prices and foreign currency headwinds could have a negative impact of FedEx’s Q3 results. Consensus is down to $1.87 a share from the $1.91 of three months ago, so experts opine that FedEx would have to report earnings of at least $1.93 a share on revenue of around $11.88 billion to support another bullish run. FedEx shares have mostly traded in the $170-$180 range in the last three months, hitting an all-time high of $183.51 in Dec 2014. The FedEx stock carries a price estimate of $173.29 a share, which is lower than its current price, and a ‘buy’ guidance.
