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FedEx Corporation (FDX): The TNT Bid

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FedEx Corporation (NYSE:FDX)The second largest U.S. package delivery company, FedEx Corporation (NYSE:FDX), and the world’s largest package-delivery company, the United Parcel Service, Inc. (NYSE:UPS) or UPS, have delivered contrasting results. While the former reported a rise in revenues and a sharp drop in earnings, the latter saw increasing top and bottom lines – despite the setbacks coming from the failed acquisition bid for the European package delivery giant TNT Express (NASDAQOTH:TNTEY). FedEx Corporation (NYSE:FDX), however, captured global headlines due to a deal with the U.S. Postal Service even though the deal might not be as attractive as investors would have liked.

The TNT bid

United Parcel Service, Inc. (NYSE:UPS)’ bid to purchase TNT Express for $7 billion was blocked by European Union regulators in January. TNT is the world’s fourth-largest package delivery firm, with a market cap of more than $4 billion. Its shareholders were excited at the prospect of a possible deal, but its stock plummeted by 50% on the day that the EU regulators vetoed the deal. The metaphorical silver lining, however, was that the net profit in TNT’s most recent earnings report rose almost 10 times to $185 million due to the $257 million merger termination fee it received from UPS . Excluding that, however, the company’s performance was less than satisfactory. The company’s adjusted earnings before interest and tax from continuing operations fell 16% from the previous quarter to $49.5 million as revenues dropped 4.5% to $2.15 billion. Without United Parcel Service, Inc. (NYSE:UPS), TNT will have a challenging future ahead, particularly in Europe. The company’s cost cutting plans, including the elimination of 4,000 jobs and divestment from less lucrative operations, are now back on the table.

Earnings

FedEx Corporation (NYSE:FDX) reported its 3rd quarter earnings on Mar. 20, beating revenues but failing to meet earnings estimates. Revenues rose 4% from the same quarter last year to $11 billion, which is about $150 million above estimates, while net income dropped 31% to $361 million. This translated into earnings of $1.23 per share, as opposed to that $1.38 per share that was expected. Operating income fell by 28% from $813 million to $589 million, while the company’s operating margin fell to 5.4% from 7.7% last year. UPS, on other hand, reported revenue growth of 2.21%, climbing from $13.14 billion to $13.43 billion but fell short of Wall Street’s expectations of $13.46 billion. Net income rose 6.9% to $1.04 billion or $1.08 per share, however, which was significantly above analysts’ expectations of $1.01 a share. Operating profit was $1.58 billion, showing a modest rise from $1.57 billion, while the operating margin fell slightly to 11.8% from 11.9%.

Growing segments

FedEx Corporation (NYSE:FDX) Express reported revenues of $6.70 billion, showing growth of 2% from last year’s $6.54 billion and coming in $100 million short of estimates. Its operating income fell an enormous 66% to $118 million from the $349 million a year ago as customers switched towards cheaper alternatives. The Ground segment reported revenue of $2.75 billion, showing a growth of 11% from last year as its average daily volume rose 10%. FedEx Corporation (NYSE:FDX) SmartPost reported a 26% surge in volume due to an increase in e-commerce activities, though its operating income rose by just $2 million to $467 million. FedEx Freight’s revenues also increased slightly to $1.24 billion, but the unit swung to an operating income of $4 million from a loss of $1 million last year.

2012 2013 % Change
FedEx Express Segment
Revenue $6.54 Bn $6.7 Bn 2.4%
Operating Profit $349 M $118 M -66.2%
FedEx Ground Segment
Revenue $2.48 Bn $2.75 Bn 10.9%
Operating Profit $465 M $467 M 0.4%
FedEx Freight Segment
Revenue $1.23 Bn $1.24 Bn 0.8%
Operating Profit $4 M -$1 M

Meanwhile, UPS reported a 3% growth in revenues and a 9% growth in earnings in its US domestic package operations. This came on the back of a 5% growth in volume by UPS Ground. The company’s international package segment showed lackluster performance, despite an 8% increase in its Asian daily export volume. Moreover, the millions spent on the attempted acquisition discussed earlier have also dragged the unit’s income. The income from the supply chain and freight segment fell 14% due to the overcapacity in transpacific trade, a factor that is hurting the margins across the industry.

2012 2013 % Change
U.S. Domestic Package
Revenue $8 Bn $8.27 Bn 3.4%
Operating Profit $995 M $1.08 Bn 9.0%
International Package
Revenue $2.97 Bn $2.98 Bn 0.3%
Operating Profit $408 M $352 M -13.7%
Supply Chain & Freight
Revenue $2.17 Bn $2.19 Bn 0.9%
Operating Profit $166 M $143 M -13.9%
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