5 Things FedEx Corporation's Management Wants You to Know

By Markets Fool.com

FedEx Corporation reported another quarter of strong earnings growth last week. Revenue rose 5% to $11.9 billion and EPS soared 36% to $2.14, due to a combination of margin expansion and a lower share count.

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However, Wall Street analysts had even higher expectations, and had projected that FedEx's EPS would reach $2.22. Following the earnings release, FedEx executives spoke with investors and analysts to provide more detail on the company's quarterly performance. Here are five key points that they emphasized.

Happy with earnings

We had a spectacular second quarter as our earnings per share grew 36% to $2.14. Corporate margin rose 120 basis points year-over-year to 8.5%. -- FedEx CFO Alan Graf

While FedEx's earnings came in short of what many analysts had expected, FedEx's management team was very happy with the results. The strong EPS growth came despite a 13% increase in maintenance and repairs expense, which was driven by the timing of some aircraft maintenance events.

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FedEx posted strong EPS growth despite an increase in aircraft maintenance costs. Photo: The Motley Fool

FedEx also implemented broad-based pay raises in October, which led to an increase in payroll costs last quarter. However, the company was able to offset much of that expense through higher productivity. This testifies to the strength of FedEx's underlying business.

Fuel didn't help much

While second quarter results benefited slightly year-over-year from the net impact of fuel, due to lower fuel prices this year versus last, the year-over-year reduction in fuel surcharge revenue largely offset the benefit of the lower fuel prices. -- Alan Graf

Lower fuel prices also had a positive impact on FedEx's earnings last quarter. FedEx changes its fuel surcharges based on fluctuations in market fuel prices, incorporating a six-eight week timing lag. Since FedEx does not immediately pass fuel cost savings on to customers, it benefits from falling fuel prices.

However, the effect was much smaller than what many analysts had expected. This was a major reason why FedEx's earnings results didn't quite meet analysts' bullish targets. The reason is changes in FedEx's fuel costs also lag changes in market fuel prices. Therefore the recent drop in fuel prices will have a bigger impact on FedEx's costs in the next two quarters.

But cheaper fuel could be a long-term tailwind

We've positioned our global, powerful network around the world with exactly the right infrastructure... So we think that the decrease in oil is going to have an increase in customer demand for higher yielding products. -- Dave Bronczek, President and CEO of FedEx Express

While FedEx didn't get a big benefit from falling fuel prices last quarter, it could benefit if prices remain low going forward. Air transportation is fairly fuel intensive, so a reduction in fuel surcharges would make express shipments significantly cheaper.

In recent years, FedEx's results have been pressured as many customers traded down to cheaper "International Economy" shipping services instead of higher-margin "International Priority" shipments. International Priority service will become more cost effective if fuel prices remain low, which could cause a favorable mix shift for the FedEx Express business.

Strong cost control in the Express business

And when you think about it, our expenses were only up 1% for the quarter... and our volumes were up 7% in the US, 2% internationally, and as Mike pointed our yields were all up. So our profit improvement plan is really driving most of our success. -- Dave Bronczek

Higher productivity has driven margin expansion at FedEx Express. Photo: The Motley Fool

FedEx announced an aggressive restructuring program a little more than two years ago. This aimed to boost profit by $1.7 billion within three years, primarily by improving the efficiency of the FedEx Express segment through capacity and headcount reductions and the replacement of outdated aircraft.

This initiative has been the key to FedEx's strong earnings growth trajectory. FedEx Express saw a huge improvement in productivity last quarter. It was able to leverage its infrastructure to carry more packages with fewer people. Not surprisingly, this led to significant margin expansion.

Port slowdowns weighed on Ground results

The slowdown in the West Coast ports has been a much bigger deal than people think and a tremendous amount of inventory was simply not put through the ports in the timeframe that the retailers had expected. -- FedEx CEO Fred Smith

If there was any disappointment in FedEx's results, it was the FedEx Ground segment. FedEx Ground's operating margin declined from 15.4% to 15.2% year over year. One key headwind was the ongoing work slowdown at many ports on the U.S. West Coast.

FedEx CEO Fred Smith explained that retailers have been having trouble getting inventory in the right place at the right time. This has had a knock-on effect for FedEx, because it had set up its network for the busy holiday season based on retailers' expectation that goods would be pre-positioned in distribution centers across the U.S.

As a result, FedEx has had to move a lot of its equipment from the middle of the country to the coasts, where many items are being unloaded later than expected. This negatively affected the Ground segment last quarter. However, FedEx may see a corresponding increase in shipping demand this quarter as retailers try to catch up.

Results stay solid

FedEx's results may not have quite lived up to some analysts' expectations, but it's hard to complain about a 36% increase in EPS. FedEx's management affirmed on the recent earnings call that the company's earnings momentum should continue.

The profit improvement program at FedEx Express has hit its stride, driving higher productivity and higher margins. If lower fuel prices increase the demand for high-margin International Priority service going forward, that will add another margin tailwind. All in all, FedEx remains well positioned to produce long-term earnings growth.

The article 5 Things FedEx Corporation's Management Wants You to Know originally appeared on Fool.com.

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.