FedEx Cashes in on Online Shopping

There are many reasons why FedEx Corp. (NYSE: FDX) is considered a bellwether of the global economy.

For one, few companies can match its global reach: its FedEx Express division operates a 647-aircraft fleet that serves over 220 countries and territories. Every day, FedEx Express ships an average of 3.9 million packages, or about 11 million pounds of freight.

Moreover, FedEx is the world’s largest overnight delivery company, which means it serves virtually all economic sectors. This broad diversity of clients also puts helps it benefit from growing trends like the move toward online shopping. More on that below.

“For the same reasons that investors studied railroad stocks in the 19th and 20th centuries to understand economic trends, investors today increasingly focus on companies such as FedEx to divine the bigger picture,” Investing Daily managing director John Persinos wrote in a September 21, 2012, article in our Personal Finance newsletter.

Leaner Air Delivery Business on the Way

FedEx’s shipping business has three main segments: FedEx Express, which accounted for 61% of the company’s revenue in its 2013 fiscal year, offers worldwide delivery within one to three business days; FedEx Ground (24% of revenue) delivers packages throughout the U.S. and Canada; and FedEx Freight (12%), which ships less-than-truckload (LTL) deliveries.

As Persinos also reported, the company—particularly its air freight business—has faced headwinds as the weak economy prompted cash-strapped businesses opt for cheaper, slower options.

In response, FedEx launched a significant restructuring, which includes offering voluntary employee buyouts in order to cut its head count by 10% by May 2014, reducing the size of its aircraft fleet and buying more fuel-efficient planes. On June 3, the company announced that it had retired 10 airliners and will speed up the mothballing of 86 more. In all, FedEx expects the plan to cut its annual spending by $1.7 billion by 2016.

FedEx’s cost cuts were one factor that helped it report better-than-expected quarterly results yesterday:

In the company’s fiscal 2013 fourth quarter, which ended May 31, 2013, its revenue rose 3.9%, to $11.44 billion from $11.01 billion a year earlier. Even so, net income declined to $303 million, or $0.95 a share, from $550 million, or $1.73.

However, if you set aside unusual items, such as restructuring costs and impairment charges related to retiring older aircraft, earnings rose to $2.13 a share from $1.99. That was well ahead of the Street’s forecast of $1.96. Revenue matched the consensus estimate.

Looking ahead, the company forecasts earnings per share growth of 7% to 13% in fiscal 2014, based on its fiscal 2013 adjusted results. That implies earnings of $6.67 a share to $7.04 in the current fiscal year, which was below the consensus forecast of $7.28.

“Our profit improvement program is progressing, but we continue to see the effects of customers selecting lower-rate international services,” said CFO Alan B. Graf, Jr. in Wednesday’s press release. “FedEx Express will further decrease capacity between Asia and the United States in July.”

FedEx Express’s revenue rose 3% in the latest quarter, to $6.98 billion, while adjusted operating income rose 11%, to $460 million. The division benefited from the timing of fuel charges, service reductions on certain routes and other cost cuts, while acquisitions and growth at its FedEx Trade Networks global freight forwarding business helped increase revenue.

The division’s shipping volumes were up 2% in the U.S., and revenue per package gained 1%. Volumes rose 11% at its FedEx International Economy operations, while FedEx International Priority volumes fell 2%. International revenue per package fell 2%.

The FedEx Freight division’s revenue gained 1%, while operating profits were flat. FedEx also said that it will increase this business’s rates by an average of 4.5%, effective July 1.

Online Shopping Carts Are Filling Up

The company’s strongest performance came from its FedEx Ground division, which continues to benefit as more consumers shop online instead of at brick-and-mortar retailers. This business’s revenue surged 12%, to $2.78 billion, while adjusted operating income gained 13%, to $557 million.

Thanks mainly to an increase in the number of packages ordered through the web, the division’s average daily volume rose 10%, and revenue per package increased 2%. Average daily volume increased 25% at FedEx SmartPost, which deals with less-time-sensitive deliveries, though revenue per package declined 7% due to lower postal rates.

FedEx is perfectly positioned to profit as online shopping continues to grow. According to January numbers from the National Retail Federation, consumers will spend $327 billion online in 2016, up from $202 billion in 2012.

Quick Delivery Needed

FedEx Express should also benefit from rising demand from growing industries like technology, health care and financial services for time-sensitive shipping. To take full advantage, FedEx has expanded its Priority Alert service, which it sells under contract, to countries outside the U.S.

Using Priority Alert, packages are wrapped in pink tape to mark their importance when loading or unloading. These items are also closely monitored by a group of employees who can provide more accurate estimated delivery times. As well, Priority Alert Plus, aimed specifically at health care clients, offers services like cold storage to do a better job of preserving these items.

FedEx shares have risen nearly 15% in the past year and currently have a trailing 12-month p/e ratio of 20.5. The company’s balance sheet also looks healthy, with $4.9 billion of cash, which is nearly double its long-term debt of $2.7 billion.