FedEx (NYSE: FDX) had net income of $2.66 per share, which missed estimates of $2.69, pushing the stock down by about 3%. And yet, does it matter?
No. It’s much ado about nothing, because FedEx owns 18% of the global shipping market. United Parcel Service (NYSE: UPS) owns 19.9%, and DHL owns 9.5%. Here in the U.S., it’s effectively an oligarchy.
Plus, look at the news closely, and you’ll see the reason for the miss was lower fuel surcharges and a stronger dollar. So, FedEx earnings missed estimates because gas prices are low and because of currency changes, neither of which are core operational issues.
Rising Package Volumes
Currency doesn’t matter. FedEx operates globally. Currency shifts happen. A few years back, results were helped by the weak dollar. I don’t care how currency affects the results, as long as the underlying business remains strong.
Q4 revenue increased 2.2% to $12.09 billion, but was $290 million short of estimates. Operating income increased 4.99% to $1.27 billion. Operating margins jumped up 20 basis points to 10.49%.
The express delivery segment witnessed a 4% fall in revenues to $6.67 billion, down 3.9% year over year. This was due to fuel surcharges and currency rates.
Package volume in the U.S. increased by 2%, international economy volume increased 3%, while the priority option increased 2%. International revenue dropped 8% on a per-package basis.
Hey, low single-digit volume increase is fine. Even better, operating income increased 12% to $599 million, and that came on expanding margins – up 130 basis points to 8.89%.
FedEx ground revenues jumped 19% to $3.56 billion. Volume leapt 5%, along with a 7% jump in revenue per package.
Freight experienced a 1% revenue increase to $1.56 billion, and that caused a 4.99% increase in operating income to $136 million, and a 30 bps rise in margins to 8.8%
For the full year, earnings were $8.95 a share, increasing 27% even with the strong dollar, on revenue increases of 4.2% to $47.6 billion.
For FY16, FedEx projects $10.60 to $11.10 for FY16.
However, there are a few things to make note of. I’ve had to focus on operating results because there were significant pension accounting changes and accounting for aircraft retirement. Backing that out, operating expenses thus rose, on an annual basis, to $37 billion. That means about $10.4 billion in operating income, or about a $700 million increase year over year, or a 7% increase.
A Stock to Grab?
That’s why FedEx stock breaks its earnings into segments so you can see the total effect. Net income GAAP came in at $2.324 billion vs $2.1 billion last year, or an 11% increase. We also must focus on actual net income, because the company repurchased 6% of FedEx stock.
Now, using $10.85 as a mid-range target for next year would mean a $1.90 increase in EPS, or about 20%. We know that won’t be correct after all these adjustments. To be safe on valuation, we should assume some kind of discount to long-term analyst growth estimates of 16%. However, I think that discount also gets negated because of my three premium bonuses: 10% each for world-class brand name, 10% for being part of an oligarchy, and 10% for reliable robust cash flow of $1 billion or more annually.
So FedEx stock is at $177, and that’s 16 times long-term estimates. A PEG ratio of 1 on a growth stock is hard to find, so I say grab it while you can.
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