Ahead of the Tape: FedEx's Express Unit Delivers the Goods -- WSJ
20 September 2016 - 5:02PM
Dow Jones News
By Steven Russolillo
Don't underestimate FedEx Corp.'s air game.
Its ground segment has gotten all the attention lately, with
revenue nearly doubling over the past five years thanks to booming
e-commerce growth. But what arguably matters more is FedEx's
air-shipping Express division, its largest unit, where rising
margins are making the unit more profitable overall.
While keeping up with e-commerce growth is always important,
Express's continued momentum is the key indicator to watch in
fiscal first-quarter results, due Tuesday. Analysts polled by
FactSet estimate adjusted earnings for the period ended in August
of $2.78 a share, up 15% from a year ago. Revenue is expected to
have increased 19% to $14.6 billion.
Express accounts for more than half of FedEx's overall revenue.
It will get a boost from the $4.8 billion acquisition of TNT
Express NV, the largest deal in its history, completed earlier this
year. TNT gives FedEx a stronger footprint in Europe. Analysts at
Cowen & Co. forecast TNT will initially dilute earnings. The
company expects it to be accretive by fiscal 2018.
Express has shown promise of late. Its international airfreight
generates revenue of $54.16 per package, otherwise known as
"yield." That is the most among all of FedEx's segments and triple
what a domestic package yields. Volumes also have increased.
But what has really stood out is growth in Express's overall
operating income, surging about 170% over its past three fiscal
years. In its most recent year that ended in May, it exceeded
Ground's for the first time in six years.
FedEx shares have outperformed the S&P 500 by 3 percentage
points this year. That includes a 12% surge after its March
earnings report, its largest one-day percentage gain since 1993,
following a strong holiday season. Wall Street has gotten more
bullish, too. Some 71% of analysts who cover the company have "buy"
ratings on FedEx, the highest in four years.
Granted, FedEx's growth doesn't come cheap. The company expects
to increase capital spending 6% year over year to $5.1 billion to
keep up with e-commerce. That is almost double what it was 10 years
ago, not including TNT integration costs, which is pressuring
margins in the Ground segment. Including TNT, this projection jumps
to $5.6 billion, according to FedEx's latest forecast.
But it is FedEx's air strategy that should help this stock keep
delivering.
tape@wsj.com
(END) Dow Jones Newswires
September 20, 2016 02:47 ET (06:47 GMT)
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