FedEx Corporation ( FDX ) earnings exceeded Wall Street's forecast by a couple of pennies and operating improvements suggest more upside for FDX stock once the market gets over a lackluster outlook.
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The operating results are certainly a point in the bulls' favor. After all, we're talking about a stock in a challenged industry with an opaque outlook. The air delivery and freight industry is stuck between headwinds and tailwinds.
True, fuel prices are still low, but they are rising - and coming up against unfavorable comparisons to last year. The phenomenal growth of e-commerce is bullish, but the economies of Asia and other international markets remain weak.
More immediately, lackluster freight data is working against results. Morgan Stanley analysts note that airfreight rates were down by double-digit percentages in March and April because of overcapacity, while truckload tonnage has flat lined.
But greater efficiencies and better-than-expected revenue growth allowed FDX to deliver an upside surprise. For the most recent quarter, FedEx earnings came to $3.30 a share on an adjusted basis. Analysts on average were looking for earnings of $3.28 a share, according to a survey by Thomson Reuters .
Likewise, revenue came in above expectations, reaching $13 million vs. a $12.8 billion forecast.
FDX's Big Deal in the Spotlight
However, the real star of the conference call is going to be the largest deal FDX has ever done. In a bid to boost growth and margins, FDX closed its $4.8 billion purchase of Netherlands-based TNT Express last month. The acquisition expands FedEx's road network in Europe, which was an area of weakness for the company.
Of course, the deal comes with pressures of its own. The sluggish global economy makes it hard to generate growth so FDX just went out and bought some, but that's likely to dilute earnings until 2018. Now, impatient investors want FDX to integrate TNT as rapidly as possible in order for it to contribute to total earnings.
Perhaps the latest FedEx earnings can help the stock break out of three-month period of sideways trading.
For fiscal 2017, earnings are projected to be $11.75 to $12.25 per diluted share. That's in line with Street forecasts but it wasn't enough to keep shares from falling on the late afternoon report. Investments and higher pension costs are to blame.
FDX stock is up nearly 10% for the year-to-date. That leads the broader market by about 8 percentage points.
A reasonably solid services sector, expense improvements and a growth-boosting acquisition make FDX stock look good for more market-beating gains.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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