FedEx Reports Earnings Tuesday. Is the Delivery Giant a Buy?
When investors want a quick read on where the economy is heading, they often look to FedEx (NYSE: FDX). The company moves packages and freight for businesses across the globe, so the volume flowing through its network tracks the health of trade and industrial activity. In fact, its CEO, Raj Subramaniam, has called FedEx the heartbeat of the industrial economy.
FedEx releases its fiscal fourth-quarter results (the period ended May 31) on Tuesday, June 23 — its first update since the Federal Reserve held interest rates steady on June 17 and signaled it now sees a rate hike as a real possibility this year rather than the cuts markets had hoped for earlier this year. With borrowing costs staying higher for longer, any softness in FedEx’s business could add to growing concerns about how the economy could fare in an interest rate environment like this.
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So is the stock a buy ahead of the report?
A business that has been getting stronger
For all the worry about a slowing economy, FedEx’s most recent results were strong. In its fiscal third quarter, reported in March, revenue rose 8% year over year to $24 billion, and non-GAAP (adjusted) earnings per share climbed 16% to $5.25. The Federal Express segment, which houses the express and ground delivery networks, grew adjusted operating income 18% and expanded its operating margin for the sixth straight quarter.
Much of that strength came from business-to-business (B2B) shipping rather than consumers. Subramaniam said on the fiscal third-quarter earnings call that nearly half the company’s revenue growth was driven by B2B services — a higher-margin part of the business.
Additionally, through its Network 2.0 program, FedEx has been combining its express and ground operations to strip out duplicated facilities and routes, helping it raise its full-year adjusted earnings outlook in March. And for the fourth quarter, the company guided for adjusted earnings per share of about $5.80, which would be its strongest quarter of the year.
But the picture isn’t uniformly bright.
FedEx Freight, the company’s former less-than-truckload (LTL) business, has been the soft spot, with revenue down 5% in the fiscal third quarter as shipment volumes fell in a weak freight market. But that business is no longer FedEx’s problem. On June 1, FedEx completed the spin-off of FedEx Freight into a separate publicly traded company, trading on the New York Stock Exchange under the ticker FDXF. Because the quarter ended before the separation, Tuesday’s report will be the last to include the freight unit.
