FedEx result show the industry’s macro risks

FedEx reusable packaging

Investors were left with a bitter taste in their mouths last week when FedEx reported its fourth-quarter and annual results for fiscal 2016, which it called “a historic year of significant accomplishments”.

Operating results benefited from “improved yield management, the continued positive impacts from profit improvement program initiatives at FedEx Express and strong volume growth at FedEx Ground”, the $40bn market-cap company claimed.

However, around $3.5bn was wiped off its equity valuation last week, with around half of that due to Brexit. “One additional operating day and the positive net impact of fuel also benefited results,” FedEx also noted.

While quarterly revenues grew 7.4% to $13bn, it reported a loss of $0.26 per diluted share in the three months ended 31 May against a loss of $3.16 per diluted share one year earlier – results included several one-offs, with the biggest charge being mark-to-market pension accounting adjustments.

By comparison, adjusted earnings per share (EPS) in the fourth quarter was $3.30 on a diluted basis, versus $2.66 a year earlier.

Reported revenues rose to $50.4bn from $47.5bn annually, while operating income and net income soared to $3.08bn and $1.82bn in fiscal 2016, respectively, from $1.87bn and $1.05bn one year earlier.

The improvement in operating margins was more pronounced on a reported basis (up from 3.9% to 6.1%), than on an adjusted basis (up from 9% to 10%). Operating activities were favoured by “profit improvement program initiatives at FedEx Express, e-commerce growth and the positive net impact of fuel”, while two additional operating days also benefited the company’s transportation segments, although these factors were partially offset by lower-than-anticipated revenue at FedEx Freight.

Express revenues were flat at $6.7bn in the final quarter, but operating income more than doubled year-on-year to $757m on a reported basis, while it surged 27% to the same amount on an adjusted basis.

The ground unit, meanwhile, saw a 20% quarterly rise in revenues to $4.29bn, yielding a 9% rise to $656m in operating income in the fourth quarter, although operating margin fell 160 basis points to 15.3%.

The smaller freight unit experienced little growth in revenues with just a 2% increase that reached $1.61bn. Underlying operating profits were unchanged at $137m, while core pre-tax profitability dropped 20 basis points to 8.5%.

FedEx said it was unable to forecast the year-end mark-to-market pension accounting adjustments for fiscal 2017 – these items weighed $3.47 per share in the fourth quarter against $4.88 per share a year earlier. Due to the unpredictability of pension charges as well as “TNT Express’ financial results, including the combined impact of integration expenses and financing costs”, FedEx did not provide guidance for unadjusted earnings.

However, adjusted, diluted earnings per share are projected to be between $11.75 and $12.25 in fiscal 2017, given its forecast for moderate macroeconomic growth.

Based on its current valuation, the stock trades at 12.5x forward adjusted earnings, sporting a dividend yield just over 1%.

Source: Transport Intelligence, June 29, 2016

Author: Alessandro Pasetti

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