FedEx Corporation (FDX, Financial) reported a better-than-expected net profit for the third quarter of fiscal 2015 with earnings of $2.01 a share that comfortably beat the consensus estimate figure of $1.87 a share. Moreover, the company’s quarterly earnings grew 63% compared to earnings for the year-ago quarter. While FedEx attributed the growth mainly to higher yields and package volumes in a quarter that included the crucial peak holiday season in the U.S., the bottom line also benefited by $0.11 a share owing to the company’s share buyback program. However, the company forecast that its full-fiscal earnings would be below consensus estimates owing to lackluster economic growth across the globe. Following the results, FedEx shares were down nearly 2% at $172.28 during pre-market trading but bounced back to $173.3 at closing bell.
Revenues fall but profits increase on better margins
FedEx reported 4% year-over year growth in revenues to $11.72 billion for Q3 2015, short of the consensus estimate figure of $11.85 billion. While fuel expenses dropped 30% owing to low oil prices, the company’s international business was hurt by the strong dollar as well as lower fuel surcharges. However, FedEx’s operating income improved 50% compared to the year-ago quarter to $962 million, with the package delivery company logging an 8.2% operating margin, up 250 basis points compared to the year-ago quarter. The company’s third quarter net profit surged 53% to $580 million from $378 million in the year-ago quarter.
Segmentwise, the company’s FedEx Express division saw a flat year-over-year growth in revenues at $6.66 billion, with the results being hurt by negative foreign currency headwinds and lower fuel surcharges. While the company saw 4% growth in its Domestic package volume, including a 5% rise in overnight box, FedEx Express logged 4% growth in its International Economy volumes as well. However, volumes at its International Priority division remained flat year-over-year.
The company’s FedEx Ground division reported 12% year-over-year growth in revenues to $3.39 billion. The division saw a 7% year-over-year rise in average daily package volume on the back of growth in the home delivery and business-to-business services. Further, increases in base rates as well as higher dimensional weight charges helped the division generate a 3% increase in revenue per package. Concurrently, the average daily volume at FedEx SmartPost fell 7% year-over-year.
For the third quarter, the FedEx Freight division logged 6% year-over-year growth in revenues to $1.43 billion, with escalated rates contributing to a 3% growth in the division’s Less-than-Truckload (LTL) revenue per shipment.
FedEx competes with United Parcel Services Inc. (UPS, Financial) and privately held businesses such as DHL International Gmbh and TNT Express (TNTEY, Financial) in the air delivery and freight services market.
Outlook for fiscal 2015
FedEx, which had earlier projected its earnings for the full fiscal 2015 to be in the $8.50-$9.00 a share range, provided a revised guidance following its Q3 results. The company now expects earnings in the range of $8.80-$8.95 a share, which is below the consensus estimate of $8.97 a share. The revised guidance is based on the company’s assumption of a moderate economic growth across the globe and a 3.1% growth rate for the U.S. economy in both 2015 and 2016. Moreover, FedEx expects the negative impact of the recent rebound in oil prices and strong dollar on its overall revenues to continue through the year.
Final thoughts
FedEx reported third quarter earnings for fiscal 2015 that well surpassed consensus estimates, indicating that the company’s efforts at network realignment are paying off. However, while lower oil prices and a strong dollar continue to impact the company’s bottom line, investors are also disappointed with FedEx’s revised guidance for fiscal 2015, leading to the company’s stock declining in early trading. Experts foresee the company’s earnings growing at an average annual rate of 14%-17% over the next five years, with a likely 22% earnings growth in fiscal 2016. The FedEx stock currently carries a "buy" guidance.
