FedEx Corporation (FDX) Stock Keeps Its Wings After Earnings Beat

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FedEx Corporation (NYSE:FDX) stock had seen a bit of a breakout heading into the company’s fiscal fourth-quarter earnings report on Tuesday afternoon.

FedEx Corporation (FDX) Stock Keeps Its Wings After Earnings Beat

Over the past month, FedEx stock had returned almost 12%, against a little over 7% for rival United Parcel Service, Inc. (NYSE:UPS). Both FDX stock and UPS stock handily beat the S&P 500 Index, which gained a bit over 2% over the same period.

That gain, and a few analyst upgrades, created high expectations heading into the FedEx earnings report. FDX stock did sell off moderately heading into the report after hitting an all-time high the day before. But it was expected that a big Q4 beat would reverse those losses and lead FedEx stock to yet another all-time high.

A Q4 Beat for FDX Stock

For Q4, FedEx revenue rose a sharp 20%, aided by last year’s acquisition of TNT Express. That growth was about in line with what Wall Street analysts expected. Adjusted per-share earnings of $4.25 swamped consensus estimates of $3.88, and were near the high end of implied post-Q3 guidance of $3.80-$4.30. Clearly, both the top and bottom line represent good news for FDX stock.

Fiscal 2018 guidance was perhaps a bit more muted. The company’s guidance of $13.20-$14 in adjusted FY18 EPS almost perfectly brackets Street consensus of $13.59. Of course, FY17 EPS came in above the high end of the original FY17 range, and a bit faster economic growth could help FedEx repeat that feat this fiscal year.

All told, Q4 looks like enough to drive FedEx stock higher. Margins have been a concern, and adjusted operating margin did decline 50 bps year-over-year in the quarter, and 90 bps for the full year.

But the compression has narrowed as the year went along, and in its investor presentation FedEx cited route optimization software as a margin driver in the Ground business. TNT is dragging down margins, but that should change as synergies are captured and the business is integrated.

There were concerns toward FDX stock heading into the quarter, notably on the margin front. Those concerns aren’t completely answered by a single quarter. But it’s difficult to see Q4 as anything but a major step in the right direction.

The Long-Term Case for FDX Stock

After hours, investors haven’t reacted that favorably to the earnings beat. FedEx stock trades up 1.5% as of this writing, hardly a major move. But the long-term outlook still looks bullish for FDX stock.

TNT provides a real opportunity for growth: FedEx reaffirmed its projection for $1.2-$1.5 billion in incremental operating income from the Express segment alone over the next three years. At a 35% tax rate, that suggests an extra $3.30 or so in earnings per share.

Success on that front on its own would get FY20 EPS near $16, not even including contributions from the Ground and Freight businesses. Further growth in those businesses could see FedEx generating $20 in EPS as soon as FY21, and those types of profits likely would support a $300-plus share price. That would continue the double-digit appreciation in FDX stock to which investors have grown accustomed.

Meanwhile, UPS announced it’s raising rates around the holidays, which could allow FedEx to follow suit and improve its own margins. Further e-commerce penetration will only benefit both companies.

All told, the outlook for FedEx stock still looks bright. EPS rose 14% in FY17. The midpoint of guidance suggests 10% growth in FY18. And TNT alone can create similar growth in FY19 and FY20. That type of growth doesn’t look priced in by a 15.4x multiple to the midpoint of FY18 EPS.

FDX stock might be at an all-time high, but that doesn’t mean it’s expensive. In fact, FedEx earnings suggest quite the opposite.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/fedex-corporation-fdx-stock-keeps-its-wings-after-earnings-beat/.

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