FedEx (FDX) Down 10% On Q1 Earnings Miss & Dull FY2020 View

FedEx Corporation (NYSE:FDX) reported lower-than-expected first-quarter fiscal 2020 (ended Aug 31, 2019) results on account of weak global economy due to escalating trade tensions, and higher costs (incurred $71 million TNT Express integration expenses). Simultaneously, the company has trimmed its fiscal 2020 earnings view on anticipations of lower revenues from the aforementioned headwind.

The company’s underperformance as well as its slashed outlook made investors jittery. Consequently, the stock declined nearly 10% in after-hours trading on Sep 17.

FedEx now anticipates earnings per share (prior to the year-end MTM retirement plan accounting adjustment and excluding TNT Express integration expenses) between $11 and $13. The Zacks Consensus Estimate for the same stands at $14.67. Apart from weak revenues, the view includes increased FedEx Ground costs and the company’s major loss from its Ground business in August. Previously, during the fourth quarter of fiscal 2019 earnings release, management stated that adjusted earnings are estimated to decline in mid-single-digit percentage point year over year during fiscal 2020.

FedEx Corporation Price, Consensus and EPS Surprise

FedEx Corporation price-consensus-eps-surprise-chart | FedEx Corporation Quote

Results in Detail

The company’s first-quarter fiscal 2020 (ended Aug 31, 2019) adjusted earnings (excluding 21 cents from non-recurring items) of $3.05 per share missed the Zacks Consensus Estimate of $3.17. Moreover, the bottom line declined 11.8% year over year.

Quarterly revenues dipped marginally year over year to $17,048 million and also lagged the Zacks Consensus Estimate of $17,107 million. The top line was hampered by loss of business at the Express and Ground segments among other factors.

Operating income (on an adjusted basis) decreased 12.1% year over year to $1.05 billion in the reported quarter due to sluggish global economy and elevated costs. Operating margin also deteriorated to 6.1% in the fiscal first quarter from 7% a year ago.

Segmental Performance

Quarterly revenues at FedEx Express (including TNT Express) slid 3% to $8.95 billion due to slowdown in global economy and certain other factors. Operating income came in at $285 million, down 27% year over year. Also, operating margin slipped to 3.2% from 4.2% in the year-ago quarter.

FedEx Ground revenues rose 8% year over year to $5.18 billion in the period under consideration owing to volume growth and increased yields. Operating income came in at $644 million, down 5% year over year while operating margin contracted to 12.4% from 14.1% in the prior-year quarter.

FedEx Freight revenues decreased 3% year over year to $1.91 billion. Segmental revenues were hurt by a fall in average daily shipments. However, the segment’s operating income ascended 10% to $194 million. Moreover, operating margin expanded 120 basis points to 10.2% in the quarter under review.

Fiscal 2020 Outlook

For fiscal 2020, FedEx now forecasts effective tax rate (prior to the year-end MTM retirement plan accounting adjustment) in the range of 24-26%. Previously, the same was expected in the 23-25% band. The downside is due to lower earnings in certain non-U.S. jurisdictions. Meanwhile, the estimate for capita expenditures is fixed at $5.9 billion.

To counter the challenges posed by macroeconomic uncertainty, the company continues with its cost-reduction initiatives such as “post-peak reductions to the global FedEx Express air network to better match capacity with demand”. On the contrary, it continues to make investments aimed at boosting earnings, margins and cash flows in the long run through improved efficiency. Additionally, the company believes it will keep incurring significant TNT Express integration expenses through fiscal 2021.

2020 Rate Hikes

With effect from Jan 6, 2020, the company will be increasing shipping rates for FedEx Express, FedEx Ground and FedEx Home Delivery by 4.9% on an average. Meanwhile, FedEx Freight shipping rates will be raised by 5.9%.

Additionally, FedEx has notified its intentions not to apply additional residential surcharges for the holiday season, except for packages that oversized and unauthorized or those that require special handling. This marks the third straight year of the company not imposing additional surcharges during the peak shipping season.

Zacks Rank & Key Picks

FedEx carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader Transportation sector are Radiant Logistics, Inc. (NYSE:RLGT) , Controladora Vuela Compania de Aviacion, S.A.B. de C.V. (NYSE:VLRS) and Copa Holdings, S.A. (NYSE:CPA) . While Radiant Logistics carries a Zacks Rank #2 (Buy), Controladora Vuela and Copa Holdings sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Radiant Logistics, Controladora Vuela Compania and Copa Holdings have rallied more than 20%, 87% and 21%, respectively, so far this year.

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