On Tuesday evening, parcel delivery giant FedEx (FDX) released the firm's financial results for its fiscal fourth quarter.
For the three-month period ended May 31st, FedEx posted an adjusted EPS of $4.94 (GAAP EPS: $6.05) on revenue of $21.93B. While the adjusted earnings print did beat Wall Street, the company fell short of expectations for revenue generation despite growing as that top line performance showed a year over year contraction of 10.2%. The adjustments to GAAP EPS were made primarily for mark to market retirement plan accounting purposes that were only partially offset by goodwill and other asset impairment charges.
Operating expenses decreased 9% to $20.427B, leaving an operating income of $1.503B (-22%) on an operating margin of 6.9% down from 7.9% a year ago. Once adjusted, the operating income becomes 1.77B (-20.6%) on an adjusted operating margin of 7.9%. down from 9.2%.
After accounting for interest and taxes, net income improved dramatically to $1.536B (+175%), but, and this is a big but... once adjusted net income becomes $1.25B, down 30.6% from the adjusted $1.8B posted for the same period last year. Last year, the same mark to market retirement plans worked against them in a big way as opposed to this year's quarter where this worked in the firm's favor.
Segment Performance
- FedEx Express drove revenue of $10.407B (-13%), producing operating income of $430M (-51%).
- FedEx Ground drove revenue of $8.296B (-2%), producing operating income of $1.004B (+18%).
- FedEx Freight drove revenue of $2.269B (-18%), producing operating income of $448M (-26%).
- FedEx Services drove revenue of $76M (flat).
- Other & Eliminated Businesses drove revenue of $882M (-22%), producing operating income/loss of $-379M (up from $-413M).
On Demand...
From the Press Release:
"FedEx Express operating results declined due to lower global volumes, partially offset by decreased expenses and higher U.S. domestic yields. FedEx Express continues to implement volume-related and structural cost-reduction actions, including further reductions in flight hours and the early retirement of certain aircraft and related assets, to mitigate the negative effect of ongoing demand weakness."
From CEO Raj Subramaniam on the Call:
"Total revenue in the fourth quarter was down 10% year-over-year as volumes declined with demand remaining soft across the market. With this said, the rate of volume decline in Ground and Express improved sequentially. As expected, yield trends have been pressured in international markets where the supply demand balances have changed. We continue to maintain our focus on revenue quality and are committed to our disciplined pricing approach focused on the long-term."
Guidance
As what is obvious from the above, FedEx is unable to forecast the adjustments that will be made going forward for marking its retirement plans to market. Therefore, the firm is unable to provide guidance for an effective tax rate on a GAAP basis.
That said, for the current fiscal full year just started, FedEx sees flat to low single digit revenue growth that will produce an EPS of $15 to $17 before the MTM retirement plan adjustment and an adjusted EPS of $16.50 to $18.50 after, which also excludes costs related to business optimization initiatives. This pulls the midpoint of 10 firm's range well below the $18.30 to $18.35 or so that would have satisfied Wall Street. And Wall Street was already looking for revenue growth of slightly more than 1%.
Fundamentals
For the full fiscal year just ended, FedEx generated operating cash flow of $8.815B (down more than $1B y/y). Out of this came capital expenditures of $6.174B, leaving free cash flow of $2.641B. The firm returned $2.677B to shareholders throughout the year ($1.5B in shares repurchased, $1.177B in dividends paid), which almost perfectly matches up with free cash flow. I am not going to split hairs over less than $40M for a firm of this size. The firm still has $2.6B remaining in its existing repurchase authorization.
FedEx still has $2.6B remaining in its current share repurchase authorization. The firm expects to repurchase $2B worth of that stock in fiscal 2024, while already having increased its dividend to $5.04 per share (yields 2.18%).
Turning to the balance sheet, FedEx ended the quarter with a cash position of $6.823B and current assets of $18.577B. With current liabilities adding up to $13.553B, the firm is left with a current ratio of 1.37, which is healthy. Total assets amount to $87.11B, including $6.435B worth if goodwill. At 7.4% of total assets, this is insignificant.
Total liabilities less equity comes to $61.022B. Long-term debt makes up $20.453B of that. Readers know that I cannot be happy with the firm's debt to cash ratio, but the current situation is fine. That said, if asked (have not been asked), I would advise to redirect some free cash from share repurchases to the pay-down of debt.
Wall Street
I have come across 10 highly rated (four or five stars at TipRanks) sell-side analysts that have opined on FDX since these earnings were release last night. Among our 10 analysts, there are nine "buy" or buy-equivalent ratings and one "hold" rating. The average target price across these 10 is $273.50 with a high of $290 (Ken Hoexter of Bank of America) and a low of $251 (Brian Ossenbeck of JP Morgan).
Once omitting these two as potential outliers, the average target price across the other eight drops rises to $274.25. You did not ask, but the average target across the nine "buys' was $276.
My Thoughts
Demand is tough. That's a headwind that the firm admits will drag on. FedEx is doing a much better job from an administrative point of view and in cutting expenses under Subramaniam than under his predecessor. The firm is no longer a living example of corporate mismanagement. The dividend is competitive. The stock trades at a below S&P 500 15 times forward looking earnings.
The closest competitor, United Parcel Service (UPS) , which traded lower overnight with FedEx, trades at 16 times and pays a much better dividend, yielding 3.66%. UPS is also run by CEO Carol Tome who I think of as a winner from her days as CFO at Home Depot (HD) . That said, the gap between Tome and Subramaniam is not what it would have been between Tome and former FDX CEO David Bronczek. Subramaniam has the confidence of founder Fred Smith.
We see that the stock broke out from the $217 pivot created by the August through February cup with handle pattern. That would have placed the stock's target price at $248 in my opinion, which has not happened, at least not yet.
The stock has no basis for more than three months and still stands in that range. If one moves on to this less interesting pattern, then the pivot moves to $235, and the target to $270, which is more in-line with the rest of Wall Street. My opinion is that FDX can be bought here and added to down to $214. If that breaks than the trade brakes.
Do I act on that? I don't think parcel delivery is going to do all that well in a tough economy. That said, if one wants to jump, take a look at this set-up...
UPS has an unfilled gap to the upside that needs $195 to fill. Since falling out of bed in April, these shares have built a classic cup with handle pattern with a $180 pivot. That would put my target up around $207. Better technical set-up. Better CEO. Fatter dividend. But... lousy economy. Food for thought.
