Economy Weakens, FedEx Corporation Strengthens

By Markets Fool.com

and have traditionally been seen as correlated plays on global growth. Both companies, however, are benefiting from specific business trends, such as e-commerce growth, which favor their abilities to decouple from the economy. Let's take a look at the tale of FedEx's fourth quarter to see what happened, and whether these trends are ongoing.

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IMAGE SOURCE: FEDEX CORPORATION

Reported revenue increased 7.4%, to $13 billion, in the fourth quarter, with the company reporting a $70 million net-income loss. Don't panic... it's not as bad as it looks.

FedEx took a $1.5 billion pension accounting adjustment in the fourth quarter; but because it's non cash, it doesn't have a meaningful impact on the underlying earnings or cash flow. In fact, on an adjusted non-GAAP basis, net income increased an impressive 19%.

Here's what FedEx's buisness results look like on a segmental basis.

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Segment

Revenue ($billions)

Growth

Operating Income ($millions)

Growth
Express 6.72 flat 753 27%
Ground 4.29 20% 656 9%
Freight 1.61 2% 137 flat

SOURCE: FEDEX CORPORATION PRESENTATIONS.

Once again, express was the star performer, with ongoing yield improvements on the company's profit-improvement initiative resulting in a substantial adjusted operating-margin increase to 11.3% from 8.9% in last year's fourth quarter. It's a good result; but on the last earnings call, CEO Fred Smith had outlined expectations for 12%.

As you can see above, FedEx needed margin expansion because revenue was flat, with lower fuel surcharges and unfavorable currency movements offsetting underlying improvements in revenue.Turning to freight, flat operating income doesn't look impressive, but it comes in the context of difficult end markets.

FEDEX GROUND NEEDS TO EXPAND NETWORK CAPACITY TO SERVICE ECOMMERCE GROWTH. IMAGE SOURCE: FEDEX CORPORATION WEBSITE

In case you're wondering aboutthe 20% increase in revenue, itwas partly driven by the recording of SmartPost revenue on a gross basis. In such circumstances, it's a good idea to disregard the margin decline from 16.9% to 15.3%, and focus on the impressive 9% in operating income.

In common with UPS, FedEx has seen two favorable industry trends in 2016. First, strong e-commerce growth is helping counteract the effects of a weakening global economy. Second, the relative strength of consumer spending is helping offset weakness in business-to-business (B2B) deliveries.

Both trends look set to continue with CEO FedEx Services Mike Glenn stating, "FedEx Ground average daily volume grew 10% year over year in Q4, primarily driven by continued growth after peak season for both residential and commercial deliveries."

However, the increase in e-commerce revenue is also creating the need for extra investment. CFO Alan Graf outlined: "We anticipate Ground operating margin will be negatively impacted by higher operating costs in FY17, driven again by network expansion. Other operational costs may also impact margins as residential volumes grow from e-commerce."

Naturally, most of the attention of analysts on the earnings call was focused on the integration of TNT -- which is no surprise because management's EPS guidance for $11.75 to $12.25 excludes TNT's financial results. It's a fact that highlights the importance of a successful integration to the stock's prospects in its fiscal 2017.

Alongside the TNT integration, FedEx's 2017 will be defined by its ability to capitalize on the favorable industry trends discussed above while managing thecosts of expanding ground-network capacity to deal with burgeoning e-commerce demand. The fourth-quarter results indicate a company on a good track, even as the economy weakens: FedEx lowered its estimate for U.S. GDP growth in the calendar year to just 1.8% from a previous estimate of2.2%. However, there's much to do in the coming fiscal year for the package-delivery giant.

The article Economy Weakens, FedEx Corporation Strengthens originally appeared on Fool.com.

Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of and recommends FedEx. The Motley Fool recommends United Parcel Service. 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.