On Wednesday, FedEx Corporation (NYSE:FDX) reported adjusted EPS of $2.13, which excluded $1.18 per share of business realignment and aircraft impairment charges. This result exceeded analyst expectations by about 9%, but FedEx provided relatively downbeat earnings guidance for the upcoming fiscal year.
FedEx has been managing through a drop-off in demand for its priority delivery services, especially internationally. On the other hand, FedEx Ground is benefiting from the strong growth of e-commerce, and the company is cutting costs in the Express business to better align with demand.
FedEx Corporation (NYSE:FDX)’s cost improvements will probably lead to robust profit growth over the next few years even if the current weak demand environment persists. Moreover, the company will be well-positioned for the next uptick in global GDP growth. Given that FedEx trades at a very reasonable valuation — just 16 times trailing earnings — it is likely to deliver strong returns for investors over the next several years.
Building a better platform for growth
FedEx Corporation (NYSE:FDX) got its start in the priority air shipment market, but has more recently diversified into other segments of the cargo and freight market. During the company’s conference call on Wednesday, executives noted that FedEx Ground has gained market share for 54 consecutive quarters and is showing strong profit growth. Moreover, robust demand for international economy shipments is offsetting weakness in international priority deliveries.
The problem for FedEx Corporation (NYSE:FDX) is that its Express air cargo network has been oriented toward servicing high-yield priority shipments. With many customers becoming more price-sensitive, FedEx needs to cut some of its Express capacity, as it is usually more cost-effective to send economy shipments by sea or through a cargo contract with a commercial airline. Indeed, FedEx cut capacity to and from Asia in April, and will cut another Express flight to Asia in July.
On the conference call, management kept coming back to the theme that FedEx Corporation (NYSE:FDX) can thrive regardless of whether customers prefer priority or economy shipments. In fact, FedEx can potentially earn better returns on economy packages because it can use contracts with other carriers for those shipments, whereas priority services utilize FedEx’s airplanes and are therefore more capital-intensive. As long as FedEx optimizes its network for the demand that exists in the marketplace, it can grow earnings even if demand continues shifting toward “economy” services.
Take the long view
FedEx Corporation (NYSE:FDX) shares dropped more than 4% on Thursday morning, as some Wall Street analysts downgraded the stock. Many analysts seem overly concerned with the profit outlook for the next 12 months, which is somewhat weaker than expected. Yet this “disappointment” mostly relates to the timing of restructuring savings; most of the benefit will accrue in FY15.