Overnight Shipper Delivers

 | Dec 19, 2012 | 1:30 PM EST  | Comments
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FedEx (FDX) reported a solid fiscal second quarter with typical conservative guidance and the story remains on track. With shares up 12% from recent lows, expectations were high headed into the print today (we even trimmed this back yesterday) and we are pleased that the company more than delivered, especially on Ground and Freight results. With lower oil prices, Hurricane Sandy costs a one-time issue, and encouraging volume trends (especially e-commerce) the stage is set for better earnings ahead. We see significant upside to margins (cost cuts, pricing, market share), which could be the wildcard going forward.

When we first added this position, it wasn't really for this quarter or next but for its exposure to the globalrecovery, which we expect to improve throughout 2013, and its internal restructuring program, which the company said remains on track to deliver $1.7 billion profit improvement by fiscal 2016 (it is currently in its fiscal 2013 period).

Excluding Sandy, earnings beat consensus with $1.51 per share vs. a $1.40 expectation. Revenues topped consensus as well at $11.1 billion vs. $10.82 billion expectation and up 4.8% from a year ago. The better  results were driven by improvements in Ground, Freight and pockets of areas in Express.

The outlook was conservative for the fiscal third quarter at $1.25 to 1.45 with consensus at $1.45 and reaffirmed full year at $6.20 to $6.60. The tone was cautiously optimistic  about the global economy but very positive about  execution, progress on the restructuring and market-share gains against its largest rival, UPS (UPS).

The clear highlight were Ground results, with revenues up 11% from a year ago and operating income up 4%. Average daily volumes rose 8% on increases in both FedEx Home Delivery and B2B services. Revenue per package rose 2% on higher rates and services strength. FedEx SmartPost volumes rose 17% and revenues up 2% on better e-commerce growth. We expected e-commerce to help results and this exceeded our expectation. Ground operating income increased due to higher volume and revenue per package.

Operating margins fell on lower fuel surcharges and higher purchased transportation -- something we expected tied to Sandy. Freight also posted solid results with revenue up 4% year over year, operating income up 90% and operating margin growth of 5.5%. LTL yield increased 2% and shipments increased 2%.

The laggard was Express, but with the major overhaul ongoing of this division, our expectations remain very low and we were encouraged with a few data points. Express revenue rose 4% from a year ago on its business growth and FedEx Trade Networks offset by Sandy. U.S. domestic revenue grew 1% on higher rate per pound, partially offset by lower fuel surcharges. U.S. domestic volumes fell 2% and international export volumes rose 6% on better Europe/Asia results.

Operating income and margins fell year over year due to the ongoing shift to lower-yielding international services, net fuel changes and Sandy partially offset by cost-cutting initiatives.

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