Here’s Why You Should Ignore the FedEx Earnings Miss (FDX)

The latest FedEx (FDX) earnings report wasn’t very popular with investors.

FedEx FDX FedEx stockFedEX delivered net income of $2.66 per share, which missed analyst estimates of $2.70, sending the stock down 3%.

Does it really matter that FDX missed the target number, though? Hint: It doesn’t. When a company is part of an oligarchy, an earnings miss really doesn’t mean much.

Because FDX controls about 14% of the global express shipping market, I regard it as being one of the must-own stocks in the sector. Along with United Parcel Service (UPS), which owns 20%, and DHL which owns 9%, and a few smaller players, express shipping is basically an oligarchy.

Here in the U.S., it’s effectively part of a triopoly, and will grow to 18% global markets share after it closes its acquisition of TNT Express (TNTEY).

FDX Will Shrug Off Currency Concerns

I’m always amused when big companies with dominant market share miss estimates, as FDX did, and the stock sells off for reasons unrelated to the core business model. The reason for the miss was lower fuel surcharges and the strong dollar.

In other words, FedEx earnings missed estimates because gas prices are low and it couldn’t extort extra fees from clients, and because of currency fluctuations. Big deal.

Does currency really matter? I think it’s a good question, but in the case of FDX or other companies that have such a huge market position, I’m just not concerned. FDX operates globally. Currency shifts happen. A few years back, results were helped by the weak dollar. So I generally discount how currency affects the results, as long as the underlying business remains strong.

And how is that business doing, exactly? Q4 revenue rose 2.2% to $12.1 billion, and came in about $300 million short of expectations. Meanwhile, operating income increased 5% to $1.28 billion. Now that’s good news, especially since margins shimmied up 20 basis points to 10.5%.

FDX Express Shows Volume Growth

FDX separates its results into segments so we can drill down further. The Express segment saw a 4% decline in revenues to $6.7 billion. But as mentioned, this drop was due to the surcharges and currency rates.

More importantly, volume in the U.S. grew 2%, international volume grew 3% (the economy option), and the priority option grew volume 2%. International revenue fell 8% on a per-package basis due to the aforementioned factors.

I care about increasing volume far more than currency fluctuations. Even low single-digit increases are perfectly acceptable. Moreover, despite the revenue declines, operating income for the Express segment popped 12% to $598 million, and that came on soaring margins — up 130bps to 8.9%. That’s excellent.

Ground and Freight

FedEx wasn’t even in the ground business in the late 1990s. That was the exclusive territory of UPS. So FDX had to play catch up. And here we are, 15 years later, with the Ground segment growing strongly.

Revenues increased 19% to $3.6 billion, helped by an acquisition earlier this year. Volume increased 5%, with a 7% increase in revenue per package. The bad news was that operating margins fell 310 bps to 16.9%. Ouch.

In the final segment, Freight, we saw a minor 1% revenue increase to $1.57 billion, leading to a 5% increase in operating income to $137 million, as margins rose 30 basis points to 8.7%.

Bottom Line for FedEx Stock

The full fiscal-year totals weren’t bad, either. Earnings were $8.95 per share, up 27% even with the strong dollar, and revenues were up 4.2% to $47.5 billion.

Going forward, FedEx stock is targeted to earn between $10.60 to $11.10 for FY16.

With FDX stock at $177, it trades at 16x long-term estimates. So what I see is a growth company that is trading at or near a PEG ratio of 1.0. I think that’s pretty darn good, and it’s worth considering FDX stock here.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/fdx-misses-estimates-matter/.

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