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Fed-Ex: The Good, The Bad and The Ugly


While FDX's margins were disappointing, the company is showing pricing power and did keep its full-year estimates intact.


It was a slightly strange quarter as Fed-Ex (FDX) both missed and beat consensus estimates, depending on how you want to look at it.

Ex-costs associated with a new pilot's contract, FDX reported $1.89 vs. consensus estimates of $1.76. However, subtracting out the $.25 charge, the company missed. Beyond that, there were some pretty high expectations built into the stock, on which it mostly disappointed.

The Good:

  • FDX beat on the revenue line.
  • The company continues to take market share from UPS (UPS) and says it is starting to show pricing power.
  • Effective January 1, the company will be raising prices on air and ground shipments, by 3.5% and 4.9%, respectively.
  • Operating expenses were in line on lower fuel costs.
  • Year on year showed an earnings and operating income increase.
    • Mitigating Factor: This was lower than what the Street was looking for.
  • FDX tightened the lower end of its guidance range.

The Bad:

  • FDX missed EPS estimates, unless you accept its excuse of a new labor contract with the pilots.
    • This is acceptable given that estimates were excluding it.
  • Operating margin came in lower than was hoped for at 9.3 versus expectations of 10.3.
  • Operating income growth rate was 6% versus a hoped for 16.5%.
  • Revenue per package growth and average daily package volume growth were below expectations.

The Ugly:

  • The company guided below its third quarter consensus estimates ($1.20-$1.35 vs Street at $1.53).
  • Kinko's continues to perform worse than expectations.

The stock is down more than $4 on the news and I don't think I would cover my firm's short, especially given the run-up in share price over the past several months (it looks like people had extremely high expectations).

I would, however, not sell more into this news and down a couple of bucks more, I would look to lighten up my firm's volume position. While FDX's margins were disappointing, the company is showing pricing power and did keep its full-year estimates intact. Also, it is not trading at particularly rich valuations compared to historic levels. Finally, I anticipate that the Street analysts will not be concerned by the headline miss, as most analysts factored in the pilots' contract.

Editor's Note: Steve Zausner of Vicis Capital also contributed to this article.

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Position in FDX

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