Cost cuts, the integration of TNT Express and the ground delivery segment will be in focus when FedEx Corporation (NYSE:FDX) reports earnings after-the-bell. The market is expecting good things judging by the action in FDX stock.
Shares in FDX rose as much as 1.5% after the opening bell, adding to its already enviable performance. For the year-to-date, FedEx stock is up almost 10% to beat the S&P 500 by 5 percentage points.
Investors can thank the company’s massive cost cutting campaign for the brunt of that upside, but a major acquisition gets some credit too. The market will be keen for updates on both initiatives.
FDX wrapped up its four-year, $1.7 billion restructuring program during the quarter after hitting all of its cost cutting and margin expansion targets. The market loves cost cuts and the fact that FedEx achieved what it promised on time has greatly improved sentiment on FDX stock. Where it goes from here will be of interest.
Another area investors will key on is FedEx’s progress in integrating rival shipping company TNT Express. Updates on integration costs will be one area of interest. More interestingly, investors will want to hear about any macroeconomic headwinds. TNT Express is a Dutch company with heavy exposure to Europe. Sluggish growth and the looming Brexit will be challenges for TNT going forward.
FDX Has a Strong Ground Game
Closer to home, FedEx has been making hay these last few years by investing in its ground business. The ground segment is generating heavy revenue growth, but the cost structure is playing havoc with margins. In the last full fiscal year, the ground business saw top-line growth of almost 30%, but profit margins fell sharply.
FedEx’s planned rate increase should help its margins in the key segment, but investors may still worry about the implications for volume. Either way, continued investment in the ground business remains a wild card for operating profit.
FDX stock has done well to recoup losses stemming from the steep selloff that began in late 2015. Indeed, shares are up about 30% after bottoming out in the second half of January. Whether they have more outperformance in them is an open question, but at least the valuation remains favorable.
FedEx stock trades at just 12 times forward earnings on an expected long-term growth rate of less than 12% per annum. Ordinarily, a stock trades at a premium to its growth rate. Additionally, FedEx’s earnings multiple is below its own five-year average. It’s also compelling when compared with the S&P 500, which has a forward price-to-earnings multiple of 18.3.
The macro picture continues to be a concern for investors, but then that’s old news. The restructuring, acquisition and expansion of ground services are so far working in FedEx’s favor. As long as it keeps delivering on those fronts, FDX stock should continue to outpace the broader market.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
