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FedEx (NYSE: FDX) plans to report its earnings for the first quarter of fiscal 2017 on Tuesday afternoon. This is the first full quarter since FedEx completed its acquisition of rival package delivery company TNT Express.
In the earnings report and subsequent conference call, investors should look for more details on the speed and cost of the merger integration process. The growth and profitability of FedEx's ground delivery business will also be a key highlight of the upcoming earnings report.
A year of transition
For the past four years, FedEx has been working through a $1.7 billion restructuring and cost-cutting plan unveiled in Aug. 2012. FedEx completed this plan a few months ago, meeting nearly all of its cost savings and margin targets. This has helped drive the stock from around $90 when the restructuring was unveiled to roughly $160 today.
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FedEx Stock Performance, data by YCharts.
FedEx still has a little bit of cost-cutting work to do, particularly in its freight division, which lags its other main business segments in terms of profitability. However, the company's main focus for the next few years will be growth, rather than margin improvement.
FedEx has two major growth drivers right now. First, the acquisition of TNT will add nearly $8 billion in annual revenue, even before any potential revenue synergies. Second, FedEx is investing huge sums of money in its ground business to capitalize on growth opportunities related to e-commerce.
How is the merger integration going?
Investors should look for more details on the TNT integration process during the Q1 earnings conference call.
Last quarter, FedEx's management estimated that the company would incur $200 million of integration costs plus an additional $100 million of integration capital spending during fiscal 2017. However, that was a preliminary estimate and the company may be able to provide a more accurate forecast now.
Furthermore, FedEx hasn't provided earnings guidance for the TNT Express business, which will operate as its own segment for now. TNT has heavy exposure to Europe, which was part of its allure for FedEx. That said, it's possible that business uncertainty related to the U.K.'s departure from the EU will impact TNT's near-term profitability.
FedEx probably won't provide a very specific earnings forecast for TNT. But management may at least offer more qualitative commentary on profit trends in this new business segment.
How is FedEx Ground doing?
Investors should also look for information about revenue and earnings trends for FedEx's ground business. In fiscal 2016, the ground segment's revenue surged 28%, but its profit margin sank from 16.7% to 13.7%.
However, the year-over-year comparison in fiscal 2016 was obscured by a 2015 acquisition and an accounting change. Both of those developments led to higher revenue but a lower profit margin at FedEx Ground. In fiscal 2017, investors will start to get "clean" year-over-year comparisons again, highlighting the segment's organic revenue growth and profitability.
Segment revenue should continue to grow at a healthy double-digit rate, but well below last year's inflated 28% pace. The ground business' profit margin is harder to predict. FedEx CFO Alan Graf bluntly told investors last quarter that he didn't know whether FedEx Ground's profit margin would rise or fall in fiscal 2017. That's because FedEx is aggressively investing for growth -- and those investments won't pay off right away.
Graf does expect operating income to continue rising at FedEx Ground due to the segment's strong revenue growth. Still, investors would obviously prefer to see the ground profit margin stabilize sooner rather than later.
A first look at the new FedEx
Between the TNT acquisition and the rapid growth of the ground business, FedEx is entering a new era. This week, investors will get a first glance at what to expect from this new-look FedEx over the next several years.
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Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool owns shares of and 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.