FedEx still paying the price for its acquisition of 'under-invested' TNT

Posted March 23, 2017

The company had reported the adjusted revenue growth of 18.1 percent to $15 billion in the third quarter of 2017, which is as per the analysts' estimates for revenue of $15 billion. Revenue was up 14.4 percent at $15.0 billion, and operating income at $1.03 billion was up 17.2 percent.

FedEx now has the highest market share in the express business and is a fierce competitor in the ground delivery business, according to Oppenheimer analysts, who said, "both of which (particularly Ground) are benefiting from an e-commerce tailwind".

And at FedEx Freight, operating income dropped 27%, from $56m to $41m, despite a 3% upturn in revenue to $1.49bn, again associated with increased staffing costs as well as IT expenses.

The Trump threat to world trade growth should not be underestimated as analysts digest the latest earnings. Total daily worldwide export packages at 589,000 were up 4 percent, and revenue was up 1 percent at $53.92.

Revenues at the TNT Express segment came in at $1.79 billion during the quarter. FedEx said these results include $16 million in intangible asset amortization expense and $22 million of integration expenses, including restructuring charges.

The company said it's targeting operating income improvement at the FedEx Express group of $1.2 billion to $1.5 billion in fiscal 2020 versus the current fiscal year, assuming moderate economic growth and current accounting and tax rules.

Revenue rose 19 percent, however, reflecting a rise in fuel and other costs, margins were lower in the ground and freight segments and net income rose only 11 percent. The company has Relative Strength Index (RSI 14) of 55.58 along with Average True Range (ATR 14) of 2.57. The retail and e-tail industry and consumer shopping patterns continue to evolve.

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FedEx said its third-quarter operating results were impacted "by the significantly negative net impact of fuel and one fewer operating day at FedEx Express and FedEx Ground [plus] network expansion at FedEx Ground".

That is especially reflected in how FedEx is not adjusting its fuel surcharge on a weekly basis rather than a monthly basis for Express and Ground. When we look at the Volatility of the company, Week Volatility is at 1.40% whereas Month Volatility is at 1.29%.

The company projected final fiscal 2017 earnings ranging from $10.80 per share to $11.30, however, because results for TNT Express, acquired earlier this year, will finally be folded in. (NASDAQ:AMZN) replacing FedEx for deliveries, and FedEx is investing heavily to make sure it can't arbitrate it away.

Jerry Hempstead, president of Hempstead Consulting, said that like UPS FedEx had "profitless prosperity" during the holiday rush.

"We provided capacity that went unused", FedEx Chief Financial Officer Alan Graf said on a conference call Tuesday. "It may appear that the incremental business from a "handful" of seasonal e-commerce shippers erased the profits of what should have been a sterling quarter".

JPMorgan Chase & Co. reaffirmed their outperform rating on shares of FedEx Co.

Cowen analyst Helane Becker also expressed concern about how well FedEx did over the holidays. "The management team is very bullish on the future in particular with the integration of TNT into their network and the synergies that will result when fully integrated".