Earnings for FedEx Corporation ( FDX ) stock are actually a lot more important than investors or the market assign to them.
This wasn't always the case. Years and years ago, FedEx was named Federal Express and was but one of several overnight carriers, from which very little macroeconomic data might be gleaned. It just didn't have the market share.
However, FDX slowly grabbed market share away from the post office, expanded its operations far beyond overnight delivery and became part of an effective oligarchy with companies like United Parcel Service, Inc. ( UPS ). Both of these behemoths made monster acquisitions, to the point where between them they own about 80% of the market . UPS actually controls about 55%.
Now these two companies offer important insight into the functioning of the domestic and global economies. The idea is that shipping stuff around the world is a major part of many businesses. The more they ship, the more demand there must be for product. If pricing power is added to the mix, and it doesn't affect demand, then the economy is likely doing well. The converse is also true.
So, without any further ado, let's peer into the crystal ball that is FedEx earnings:
FedEx Fiscal Q3 Earnings
FedEx earnings for its fiscal third quarter were nice on their face, but mixed in the details, and that's in part because the Express segment is struggling a bit compared to the Ground division. Express did have revenue of $6.56 billion, which is pretty darn huge, but it is down 1% from last year. That's the result of lower fuel surcharges and those dastardly currency exchange issues dogging every company. Still, it's important macroeconomically to note that domestic volume increased 2%.
Express operating income was $595 million, up 51%, from $393 million a year ago. Now, how can operating income soar like that on tiny revenue increases? There's only one answer, and that's expense cuts, and other initiatives known as "yield management."
As mentioned, FedEx Ground is really tearing things up. Revenue was $4.41 billion, up 30%. That's due to an 11% increase in volume, which we would expect since Ground is less expensive for consumers. But it's also due to how FedEx accounted for its SmartPost revenues and because it folded in results from an acquisition that wasn't there before.
Still, let's not discount that huge upswing in volume.
However, Ground operating income fell 0.5% to $557 million, and margins fell to 12.6% from 16.5%. What the heck is that about? FedEx expanded its network, and demand was greater than expected. When that happens, volume and revenues do increase, but if a company isn't ready to handle all that excess shipping, it can drive costs up a lot. That same acquisition also dragged margins down because it doesn't operate as efficiently and operations haven't been integrated into FDX's way of doing things yet.
Meanwhile, the FedEx Freight segment was also up marginally, with revenue of $1.45 billion, up 1% from last year's. Operating income was down 16% to $56 million thanks to salary and benefit increases racing ahead of volume growth.
Bottom Line for FedEx … And the Economy
Investors clearly liked what they heard out of FedEx broadly, as FDX stock was looking at 5% to 6% gains in early Thursday trading.
The overall numbers included adjusted earnings of $2.51 per share on revenues of $12.7 billion. That's a nearly 25% jump in earnings on a 9% improvement in sales. Plus, that's also a beat on both lines - Wall Street was looking for $12.38 billion up top, and $2.34 per share on the bottom.
Guidance was raised on the bottom end, too, from a range of $10.40 to $10.90 per share on the full-year to $10.70 to $10.90.
It's a simply rosier picture for FDX overall, and besides, FedEx had a big hole to climb out of this year. It's merely clawing itself back up to square.
From a macroeconomic perspective, FedEx results suggest that very slow economic growth is all that remains. The Ground segment's results also suggest that people and businesses are constantly looking for ways to decrease their expenses, by using the less expensive options to ship items.
Neither of those are a particularly promising picture.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years' experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com .
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