FedEx (FDX, Financial)Â reported stronger-than-expected first quarter earnings last week, posting adjusted EPS of $2.90 on the back of $14.66 billion revenue against the market’s expected EPS of $2.81 and revenue of $14.61 billion. The stock price has risen from $162.65 on Sept. 20 to around $175, a nice jump of 7.5%.
First quarter revenues have jumped nearly 19.4% from $12.27 billion last year to $14.66 billion this year. But the major portion of the increase was due to additional income from the newly acquired TNT (XAMS:TNTE, Financial) business. All the segments grew for FedEx, but the star performer was the FedEx Ground segment, which grew 12% year over year while adjusted operating margin for the Express segment grew by 140 basis points.
One of the key differentiators between Fedex and UPS (UPS, Financial) – apart from bigger size and scale of UPS – is that the latter has always enjoyed higher margins compared to FedEx. Consolidated operating margin for fiscal 2015 was 6.1% for FedEx while UPS posted more than twice that – 13.1%. Both these companies’ operating margins fluctuate every year, but UPS has always ended up with higher margins than FedEx. First quarter GAAP operating margin for FedEx came in at 8.6%, much lower than the 9.3% the company reported last year.
The company has made it its mission to improve its margin numbers, so it will be extremely important to watch how its margins move over the next few quarters, especially after the company integrates TNT’s operations with its own. The $4.8 billion acquisition of TNT will obviously increase the top line, allowing the company to close the gap with UPS, but it also has the potential to improve overall margins for the company in the long run.
“We believe the TNT acquisition, the largest acquisition in FedEx’s history, transformed the world's transportation logistics industry rapidly accelerating our European and global growth strategy as one-third of total FedEx Corporation revenue now touches a country outside of the U.S.” – FedEx
FedEX is projecting the TNT acquisition to be dilutive in fiscal year 2017 due to expenses related to integration, restructuring and asset amortization. But as the company completes its restructuring program and exploits the resulting synergies it will reduce the overall costs, improving its operating margin numbers. The expanded reach of FedEx’s delivery network in Europe will also have a net positive effect on the numbers.
The growth of ecommerce has been and will be a huge windfall for all logistics companies. UPS and FedEx are certainly ready to exploit this growth segment for a long time. FedEx has started the year on the right note, and the stock is already up by more than 22% over the past 12 months. As even more retailers jump onto the ecommerce bandwagon and global GDPs expected to stay on the positive side, this looks like it could be a great fiscal for FedEx.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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