FedEx Corp. (FDX, Financial) reported solid fourth-quarter earnings results on June 20, beating Wall Street expectations on both the top and bottom line. The market was expecting earnings per share of $3.88 on quarterly revenues of $15.56 billion, but FedEx surpassed both numbers by a wide margin, reporting EPS of $4.25 on the back of $15.7 billion in revenue.
The star performer was the company’s Express segment, which reported $7.18 billion in revenues for the quarter, with an operating margin of 12%. Express segment revenues increased 7% during the quarter compared to last year due to increased package volume and higher base rates.
The acquisition of TNT has also helped FedEx close the revenue gap with its rival, United Parcel Service Inc. (UPS, Financial). For the quarter, UPS reported total revenue of $15.3 billion, slightly lower than FedEx's $15.7 billion in revenue. For fiscal 2016, UPS clocked $60.906 billion in revenues against FedEx’s $60.3 billion in fiscal 2017.
Margins contracted from 11.2% in the fourth quarter of last year to 10.1% this year as the Express segment's margins increased 70 basis points. This was offset, however, by a 30-point decline in the Ground segment and a 70-point decline in the Freight segment.
But for the full year, FedEx’s operating margins rose. The courier company, which has historically suffered from lower margins when compared to UPS, saw its operating margin improve from 6.1% last year to 8.4% this year. Now that the company has closed the revenue gap with UPS, it will allow FedEx to focus on improving operational performance and reducing UPS’s marginal advantage.
FedEx’s stock price has shot up by more than 30% in the last 12 months, and it might continue its move upward due to positive sentiments surrounding its strong earnings report.
When compared to UPS, FedEX still has room for improvement. UPS trades at 1.55 times sales and 18.72 times earnings, much higher than the 0.93 times sales and 17.64 times earnings FedEx is trading at. If the company continues to improve its margins over the next four quarters and its sales keep increasing, then we can expect FedEx’s current upward trend to continue for some time.
Disclosure: I have no positions in the stocks mentioned above and have no intention of initiating a position in the next 72 hours.
