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Morningstar | FedEx Reports Solid Fiscal 1Q, Nudges Annual Guidance Upward

FedEx's shares may be temporarily dinged for a slight miss versus consensus expectations, but we consider the company's strong 11% year-over-year improvement in revenue and flat operating margins to mark a solid first quarter of fiscal 2019. Optimistic about trade, management increased full-year earnings per share guidance by $0.20 to $15.85-$16.45 excluding pension mark-to-market adjustments (from $15.65-$16.25) or $17.20-$17.80 excluding pension adjustments and $365 million of net TNT integration costs (from $17.00-$17.60; similarly normalized full fiscal 2018 EPS was $15.31). We model margins to improve as the firm continues to refine and integrate its TNT assets in Europe during this season of robust freight and parcel demand. As we update our valuation model, we expect that any change to our fair value estimate would be minor and upward.

Trade barriers are a concern for transport investors, and today’s headlines describe the U.S. imposition of new tariffs on $200 billion of Chinese goods. We’re not overly concerned about the consequence because FedEx’s exposure to trade to and from the United States and China represents just 2% of its total revenue, and the firm indicates the announced tariffs affect only a small portion of pertinent goods.

We expect many winds to blow in FedEx’s favor. Ground will operate six days per week in the coming year, providing additional capacity without incremental capital expense. The TNT acquisition lapped two years, and FedEx continues to snap that ground system into its global network. Management expects growth sufficient to permanently employ a majority of the 55,000 temporary workers it plans to hire for peak season.

The firm continues to work on rates by increasing fuel surcharges and improving rates on nonconveyable items. We expect the tactic of refraining from matching UPS’ increases to residential rates during peak season can gain market share, especially among small customers that can nimbly switch providers.

Healthy volume and pricing growth continue in all three major operating segments. First, Express improved average daily parcels a solid 5% overall via growth of 3% in the U.S., 5% in international export, and 7% in international domestic; airfreight pounds improved 16%. Express composite package yield increased 3% and freight revenue per pound 5%, while operating margin increased 20 basis points to 4% (5.1% excluding TNT integration expenses). Second, Ground increased average daily volume 7% and yield a healthy 6%; EBIT margin decayed 40 basis points to a quite decent 13.9%. Finally, Freight daily shipments and revenue per hundredweight both expanded 9% from the prior-year period, and operating margin was a respectable 9%.