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Shipping giant FedEx (NYSE: FDX) posted better-than-expected quarterly results on Thursday, and the stock rose 5% in early market trading.
This was an important show of strength for FedEx. The global economy has seen momentum slow down over the course of 2015, weighed by the strong U.S. dollar and the threat of slowing economic growth in the emerging markets.
But FedEx also has some things working in its favor, including low oil prices and resilient consumer spending, which are helping boost profitability.
Let’s take a look at the FedEx earnings report for the recent quarter, and what investors can expect going forward.
FedEx Earnings Growth Takes Flight
For the fiscal second quarter, FedEx posted $2.58 in adjusted earnings per share on $12.5 billion of revenue. Both figures beat analyst expectations. Wall Street forecasts called for $2.51 in earnings per share on $12.43 billion of revenue, according to estimates compiled by Thomson Reuters.
On a reported basis, revenue and earnings per share each grew 5% year over year.
One of the factors boosting FedEx is the continued growth in e-commerce. Online retail is thriving, particularly in the United States, which is a major tailwind for FedEx’s ground shipping business. In that segment, revenue soared 32% year over year. FedEx benefited from both higher average daily volumes, as well as higher revenue per package.
Holding FedEx back last quarter was weakness in the express segment, where revenue fell 6% year over year. The company noted higher base yields, which is a positive, but this was more than offset by unfavorable currency fluctuations. The rising U.S. dollar is a severe headwind for large multi-national companies like FedEx.
What 2016 Holds for FedEx
Importantly, FedEx confirmed its prior expectations for the full fiscal year, saying it expects a robust holiday shopping season in the United States to keep its earnings going strong.
The current fiscal year should be a profitable one for FedEx. Along with earnings, the company reaffirmed its fiscal 2016 earnings outlook of $10.40 to $10.90 per diluted share.
FedEx believes it will ship 317 million packages between Black Friday and Christmas. That would represent a 12% increase from the previous year.
Another factor that would help FedEx’s growth is its pending acquisition of rival Dutch shipping firm TNT Express. FedEx has offered to buy TNT for $5 billion. A successful takeover would create the second-largest shipping company in Europe. And, FedEx would enjoy continued growth in the rapidly-expanding cross border e-commerce business.
FedEx is confident the deal will come to fruition. Management believes there will be far less regulatory backlash in Europe than United Parcel Service (NYSE: UPS) received when its own takeover attempt of TNT was blocked in 2012 due to anti-competitive concerns. FedEx expects the deal will close in the first half of 2016.
FedEx: Quality Company, Questionable Stock
FedEx has a strong brand name and operates in what essentially amounts to a duopoly. This gives it a wide economic “moat,” a term coined by legendary investor Warren Buffett. A moat describes a competitive advantage inherent in a company’s business model. This helps guard against unforeseen competitor firms from easily stealing market share.
Because of that, investors are willing to pay high valuations to own FedEx. The stock trades for 40 times earnings, which does not leave much of a margin of safety. FedEx pays a dividend, but it yields a measly 0.7%. That is less than half the approximately 2% yield offered by the S&P 500 Index.
As a result, FedEx stock is not likely to entice value or income investors. Growth investors still have plenty of reason to like FedEx, but investors may want to wait for a better price before buying FedEx stock.
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