FedEx Outperforms on Record Volume - Analyst Blog

By Zacks Equity Research,

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Before the opening bell, FedEx Corporation ( FDX ), the world's second-largest package delivery company, reported third quarter fiscal 2012 adjusted earnings of $1.55 per share. The quarter's earnings surpassed the Zacks Consensus Estimate of $1.36 and the year-ago earnings of 81 cents.

The outperformance was attributable to strong yields, record holiday shipping and a remarkable performance by FedEx Ground. Adjusted earnings exclude 10 cents per share of special items related to FedEx Express legal reserve reversal.

Total revenue climbed 9% year over year to $10.56 billion but missed the Zacks Consensus Estimate of $10.63 billion.

Operating income jumped 107% year over year to $813 million in the reported quarter. The year-over-year performance was credited to continued healthy performance by FedEx Ground and improved results at FedEx Freight. Operating margin also showed an increase of 360 basis points (bps) to 7.7%from 4.1% in the year-ago quarter.

Operating expenses rose 5.2% year over year to $9.75 billion, mainly due to a 17.5% rise in the fuel cost.

Segment Results

FedEx Express revenue was $6.54 billion in the reported quarter, up 8% year over year. Operating income shot up 96% year over year to $349 million, resulting in a 240 bps expansion in operating margin to 5.3%. FedEx benefitted from the fuel surcharge timing lag and the reversal of a $66 million reserve associated with litigation.

The FedEx International Priority ( IP ) average daily package volume dipped 1% year over year while revenue per package (yield) grew 5% on higher fuel surcharges and package weights. The U.S. domestic revenue per package rose 9% year over year despite a 4% decline in the U.S. domestic average daily package volume.

FedEx Ground revenue increased 14% year over year to $2.48 billion attributable to package volume growth at FedEx Ground as well as FedEx SmartPost. Operating income spiked 43% year over year to $465 million, resulting in operating margin of 18.8% compared with 14.9% in the year-ago quarter.

FedEx Ground average daily package volume increased 5% and revenue per package grew 8%. FedEx SmartPost average daily volume expanded 13% and revenue per package rose 5%.

FedEx Freight revenue upped 10% year over year to $1.23 billion, reflecting increases of 6% in LTL (less-than-truckload) yield and 2% in average daily LTL shipments. FedEx Freight recorded an operating loss of $1 million compared with $110 million in the year-ago quarter.

Operating margin improved to (0.1%) from (9.8%) in the year-ago quarter. The strong performance was driven by operational efficiency from the combination of FedEx Freight and FedEx National LTL completed last year.

FedEx Services revenue inched up 0.01% year over year to $401 million in the third quarter.


FedEx exited the third quarter with cash and cash equivalents of $2.04 billion compared with $2.33 billion at the end of fiscal 2011. Long-term debt dropped to $1.25 billion from $1.67 billion at the end of May 31, 2011.

Looking Ahead

FedEx has projected earnings in the range of $1.75 to $2.00 per share for the fourth quarter of 2012. The mid-point ($1.87) is lower than the current Zacks Consensus Estimate of $1.98.

Based on rising fuel prices and moderate economic growth, FedEx expects its fiscal 2012 earnings in the band of $6.35-$6.60 per share. The mid-point ($6.47) is above the current Zacks Consensus Estimate of $6.38. Including the FedEx Express legal reserve reversal, earnings are expected to be $6.43-$6.68 per share.

FedEx continues to expect capital spending of $4.2 billion for fiscal 2012.

Our Take

Despite a moderate economic growth, we believe earnings and revenue will continue improving going forward on strong demand, better pricing, continued yield (revenue per package) improvement, industrial production growth and diminishing cost headwinds. Further, solid Express growth, market share gains at Ground and a profitable Freight business from network restructuring should lead to earnings improvement.

However, increased investments, competitive threats from United Parcel Service Inc. ( UPS ), unionized workforce and steeper fuel prices could limit the upside potential of the stock.

We are maintaining our long-term Neutral recommendation on FedEx. The stock retains a Zacks #3 Rank (Hold) for the short term.

FEDEX CORP ( FDX ): Free Stock Analysis Report
UTD PARCEL SRVC ( UPS ): Free Stock Analysis Report
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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: FDX , IP , UPS

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