by Dan Burrows | September 18, 2013 12:27 pm
FedEx’s (FDX) quarterly results are starting to sound like a broken record, but let’s give credit where credit is due: Earnings beat Wall Street’s forecast — yet again — even as revenue went nowhere.
It’s the same old story with FedEx. The world’s biggest air-cargo shipper by volume is as good a global economic bellwether as they come. And for more than a year, FedEx has been saying the global economy is relentlessly weak.
No, that’s not good news — but neither is it a surprise. What is good news is how FedEx management has been able to cut costs and restructure and reform its way to higher profits despite global weakness.
For the most recent quarter, FedEx posted a 6.5% gain in income to $489 million, or $1.53 a share. That topped analysts’ average estimate by 3 cents.
More impressive was how FedEx squeezed almost 7% profit growth out of a top line that gained only 2%.
A lot of that comes from how FedEx has dealt with the ongoing slowdown in its Express service — the premium (and higher-margin) business that companies use to move things like consumer electronics and components as fast as possible.
But economic weakness, particularly in Asia, has customers opting for slower, cheaper (and lower-margin) delivery methods. Industrywide, there are too many planes chasing too few goods in need of the fastest, most expensive shipping option. As a result, the Express division had become something of an albatross. After all, it’s the company’s most profitable segment and biggest contributor to total revenues.
Fortunately for FedEx shareholders, the company has managed its slowdown well.
Cost cuts — like retiring older, less fuel efficient planes — helped the division report a 14% jump in operating profit even as revenue declined by 0.4%. And the restructuring is just getting started. Over the next four years, FedEx believes it can slash its way through Express to another $1.7 billion in profits.
Now, in a new development, FedEx said Wednesday it’s raising rates for domestic and international express shipping by an average of 3.9% starting Jan. 6. That’s bold. Slack demand should lead to lower prices. But, apparently, the addition to revenue and margins will make any decrease in volume worth the rate hike.
The market sure didn’t have any problem with the rate news or the quarterly earnings report. FDX jumped more than 4% at one point in early trading.
I’ve been bullish on FedEx as a long-term holding for some time. Management is doing a good job guiding the company through a prolonged period of anemic global growth. Eventually, you figure Europe, Asia and emerging markets will start to pick up. (We’ve already seen improvement in Europe.) And at that point, FedEx will be well-positioned to capitalize on the acceleration.
But it’s bound to be a bumpy ride — and require patience. Just look at the year-to-date performance:
The stock keeps hitting air pockets, but the end result is a 24% gain so far in 2013, beating the S&P 500 by about 4 percentage points. Interestingly, as volatile as FDX has been, it’s never gone negative.
Furthermore, shares still look like a bargain at current levels. On a forward earnings basis, the stock trades at a 17% discount to its own five-year average, according to data from Thomson Reuters Stock Reports. It’s also helpful that FedEx is in the midst of buying back up to 10 million shares.
FedEx is a well-run company at the beginning of a multiyear cost-cutting program. Shares look cheap. It’s buying back stock. It’s even raising shipping rates. Yes, there will be turbulence, but FDX should continue to deliver market-beating returns in the long run.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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