Another quarter brought yet another disappointing earnings report from FedEx (NYSE: FDX). The company missed most investors' expectations for its fiscal first quarter of 2020 and management continued a worrying trend of lowering full-year guidance -- not a good sign when it occurs in the first quarter. Let's take a look at what happened in an eventful quarter's earnings.
FedEx first-quarter earnings: The raw numbers
Starting with the headline numbers from the quarter:
- Revenue of $17.05 billion came in flat compared to the same quarter last year.
- Operating income of $977 million represented a 9% decline from last year's figure.
- Adjusted non-GAAP (generally accepted accounting principles) diluted earnings per share (EPS) were $3.05, compared to $3.46 in the same quarter last year.
Clearly, this was a disappointing set of numbers. I'll come to the guidance in a moment, but first let's look at the segment detail from the quarter. As the table below indicates, it was another weak quarter for the core express segment, and the decline in operating income outpaced the 12% decline reported in last-quarter's earnings.
|FedEx Segment||Revenue||Year-Over-Year Growth (Decline)||Operating Income||Year-Over-Year Growth|
|Express||$8.95 billion||(3%)||$285 million||(27%)|
|Ground||$5.18 billion||8%||$644 million||(5%)|
|Freight||$1.91 billion||(3%)||$194 million||10%|
|Total Company||$17.05 billion||0%||$977 million||(9%)|
Data source: FedEx presentations. Numbers don't add to totals due to other items not included among the segments listed.
FedEx cuts guidance
FedEx's guidance doesn't tend to be as detailed as many other companies, but however you look at it, management lowered full-year expectations. Going back to the fourth quarter of 2019, management had guided toward a "mid-single-digit percentage point decline in diluted earnings per share prior to the year-end mark-to-market retirement plan accounting adjustment and excluding estimated TNT Express integration expenses compared with fiscal 2019's adjusted earnings of $15.52 per diluted share."
The trade war is hurting FedEx's growth prospects. Image source: Getty Images.
This is the figure off which most analysts work. Interpolating the statement to mean a decline of 4%-6% from $15.52 gives a range of $14.59-$14.90 -- analyst consensus estimates were toward the high end of this range at $14.86. Fast forward to the guidance given on the current quarter, and FedEx now expects it to be in the range of $11-$13 -- a pretty big cut.
Furthermore, there was some disappointing news for those investors who thought 2020's so-called transitional year (by management) of investment (in order to improve profitability in the future) would lead to a cut in capital spending plans in 2021. CFO Alan Graf confirmed that full-year 2020 capital spending would come in at $5.9 billion, and then said he expects full-year 2021 will "be similar" to 2020.
Data source: FedEx presentations. Chart by author.
What management said
In a nutshell, management argued that the slowdown in the industrial economy -- seen in many leading economic indicators and industrial company earnings -- has caused a shortfall in revenue compared to expectations. As the trade war has escalated, it's hurt global trade and the industrial sector, in general.
Graf was asked where the "implied $900 million writedown in operating profit" came from by Citibank analyst Chris Wetherbee, and he replied, "The vast majority of this $900 million is the reduction of our revenue forecasts associated with the macroeconomic conditions that we did not expect." Graf sees the biggest impact coming in the express segment, particularly in international revenue in Europe.
There's no way around it: Investing in industries like package delivery or shipping always needs to be made with the understanding that end demand will go up and down with the economy.
While the macroeconomic environment and the ongoing trade conflict haven't been favorable for FedEx, the company continues to invest in expanding capacity in order to meet future demand for e-commerce deliveries. In addition, CEO Fred Smith made it apparently clear that FedEx needs to make capital spending commitments in order to keep its "competitive positioning against our major competitors."
Graf was asked about the growth outlook for 2021 and 2022 and responded by saying it depended on "your outlook for the economy, for sure. I mean, we said, we're going to be really well-positioned by the end of 2021."
In a sense, the improvement in profitability that was intended to come after the "transitional year" of 2020 has now been extended into 2021 due to the deterioration in industrial conditions. FedEx investors will need to be patient.
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