FedEx (FDX) reported fiscal first quarter 2020 earnings Tuesday night that reflected the costly integration of TNT Express, along with the tougher shipping industry hit by the ongoing trade disputes between the U.S. and foreign nations, namely China.
Looking forward, the company certainly doesn't seem to be making any big promises. The shipping giant is revamping its fleet, incurring big integration costs, and lost Amazon (AMZN) .
FedEx has been adjusting its consolidated earnings due to the integration of TNT Express. The $4.4 billion acquisition of the Dutch shipping company was FedEx's attempt at growth-based M&A. So far, however, it definitely hasn't spruced up results for shareholders on either an adjusted basis, or one based on generally accepted accounting principles. This quarter, the costs of the integration accounted for a 21 cent hit to GAAP diluted earnings.
Revenues were stagnant in the fiscal first quarer, with total sales of $17.048 billion vs. $17.052 billion a year ago. CEO Frederick W. Smith was pretty straight forward about the quarter, when he said the company's performance "continues to be negatively impacted by a weakening global macro environment driven by increasing trade tensions and policy uncertainty."
"Despite these challenges," Smith said, "we are positioning FedEx to leverage future growth opportunities as we continue the integration of TNT Express, enhance FedEx Ground residential delivery capabilities and modernize the FedEx Express air fleet and hub operations."
Since GAAP earnings take into account the $71 million in integration expenses, we'll focus on the adjusted figures that FedEx provided. Excluding those costs, FedEx reported operating income of a little under $1.05 billion. That marks an 11.7% decline year-over-year. Margins declined 90 basis points from 7% in the first quarter to 6.1%. Adjusted net income declined 14.25% to $800 million. That broke down to $3.05 per share. That's an 11.8% decline in adjusted earnings year-over-year.
Overall, FedEx is certainly giving us some real-world proof that global growth is slowing. It's one thing when the economists and think tanks tell you what their data and projections say. It's another thing entirely when the juggernaut of shipping reports revenue stagnation. To counter the tougher environment, FedEx is implementing higher shipping rates starting Jan. 6, 2020. Rates across FedEx Express, FedEx Ground as well as FedEx Home Delivery will all rise by around 4.9%. The company noted that FedEx Freight shipping rates will increase by a higher 5.9%.
Thanks to the fiscal 2020 retirement plan accounting adjustment that FedEx is dealing with, the company did not provide guidance on a GAAP basis for the full fiscal year. It did, however, announce that it was lowering the fiscal 2020 earnings forecast, as overall revenue expectations are diminishing.
Excluding the impacts of the retirement accounting adjustment, the company is expecting earnings of $10 to $12 per diluted share. If you exclude the continued impacts of the TNT express integration as well, the company anticipates earnings of $11 to $13 per diluted share.
Dependent on where this aftermarket decline leads in the morning, FedEx is trading around 14-times to 16-times forward earnings on an adjusted basis. Considering the actual earnings could be much lower, this price-to-earnings is a bit fabricated.
While obviously still a strong enterprise with global scale, I worry that a name so tied to trade could begin to really suffer if the ongoing disputes escalate. FedEx has trailed the S&P 500 over the last year, and it's not hard to see why. Overall, I don't think there's enough here to tempt one off the sidelines at the moment. I still think FedEx can do a great deal of work with Walmart (WMT) and Target (TGT) for online sales shipments. That, however, is long term. Right now, there could be some more downside on this one.