Morningstar | FedEx Shares Sink on Fiscal 2019 Guidance Cut; Reducing Our Fair Value Slightly on Slowing Express
FedEx reduced guidance for adjusted fiscal-year 2019 EPS by 7%-11% (7% on the low end, 11% on the high end of the guidance range) principally due to weakening international macro factors and delays in reaping margin improvement at TNT. We have reduced our fair value estimate to $210 from $260 as we incorporate slower international Express top-line growth and reduce our margin projections in Express and Ground--but, looking below the headline guidance cut, we note ample solid results. Most clearly, FedEx grew its top line 9%, improved EBIT by 5%, and expanded EPS 24%.However, international Express fared not nearly so well. Growth was strong in lower-priced international economy parcels and international economy freight, but yield degraded a bit on these products. Furthermore, TNT profit improvement has apparently also stalled. Weaker-than-expected mix and volume will delay the $1.2 billion to $1.5 billion of EBIT improvement previously planned from fiscal year 2017 to 2020. In fact, management did not update the date of new realization.
In response to lower international Express results, particularly in Europe and Asia, the company is offering a voluntary buyout to U.S. and international Express and Services segment employees and reducing its Express international network capacity. The buyout cash cost will come in the fourth quarter and approximate $450 million to $575 million, with savings of $225 million to $275 million in fiscal year 2020. Some of the buyout is for IT personnel who worked on older systems and hardware at FedEx and TNT.
Looking forward, FedEx sees strength in the U.S. and expects overall growth to be positive but slower than in recent periods. We are reducing our near-term growth expectations for international operations and moderating our margin improvement expectations for Express. We maintain our narrow economic moat rating as FedEx works through regional challenges.
Among other positives, U.S. domestic Express grew average daily packages 7% from the prior-year period and improved revenue 10%, while preserving operating margin at about 7.5% excluding non-recurrent events. Also, U.S. Ground grew daily parcels a strong 8% and improved revenue per package 6%, spurring 14% revenue expansion at normalized margins of 12.3%. Finally, U.S. freight trucking grew shipments-per-day by 8% and revenue per hundredweight by a strong 9%, and its 7.7% margin is near our long-run projection for the segment.
We thought a few stats that management mentioned on the earnings call are telling for why Ground can win share profitably: During the period, 96% of Ground volume moved through automated facilities (we think these cut cost around 30% versus non-automated) and on the day before the earnings report (peak consumer season), two thirds of Ground packages were delivered a day earlier than scheduled.
FedEx provides transportation, e-commerce and business services through companies under the FedEx brand. These companies are included in the following segments: Federal Express Corporation, including TNT Express B.V., is an express transportation company; FedEx Ground Package System, Inc., which is a provider of small-package ground delivery services; FedEx Freight Corporation, which is a provider of less-than-truckload freight services; and FedEx Corporate Services, Inc., which provides sales, marketing, information technology, communications, customer service, technical support, billing and collections services, and certain back-office functions.
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