FedEx Earnings: A Solid Start to Fiscal 2017

By Markets Fool.com

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On Tuesday afternoon, FedEx (NYSE: FDX) reported another quarter of strong profit growth. For Q1 of fiscal 2017, adjusted earnings per share soared 20% year over year to $2.90. Including the negative impact of integration, restructuring, and intangible asset amortization costs -- all related to FedEx's recent purchase of TNT Express -- EPS came out to $2.65.

FedEx's first quarter in a nutshell

Revenue jumped 19.4% year over year to $14.7 billion at FedEx last quarter. However, the vast majority of that increase came from incorporating the results of TNT Express, which contributed $1.8 billion of revenue. On an organic basis, FedEx's revenue grew by a far more modest 4.7%.

The company's adjusted operating margin remained roughly flat year over year at 9.3%. However, in this case, FedEx was hurt by the inclusion of TNT Express' results, as that business is barely profitable right now.

Meanwhile, the long process of tying together the FedEx and TNT Express delivery networks began in earnest last quarter. "The integration of TNT Express is proceeding smoothly, and the level of team members' engagement is outstanding," according to FedEx founder and CEO Fred Smith.

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Strong results for the express and ground businesses

In Q1, the FedEx Express business continued its trend of margin improvement despite tepid growth. Express revenue rose 1% year over year on a similar increase in package volume. Nevertheless, adjusted segment operating income jumped from $545 million to $646 million, as the segment's adjusted margin increased to 9.7% from 8.3% a year earlier.

The ground business continued to grow at a double-digit pace, with revenue up 12% year over year to $4.3 billion. While that's less growth than what investors have come to expect lately, an acquisition and an accounting change distorted FedEx Ground's revenue growth throughout fiscal 2016. By contrast, last quarter's 12% increase was pure organic growth.

The "clean" year-over-year comparison for the ground segment allowed it to post margin growth for the first time in more than a year. Segment operating margin edged up 0.2 percentage points to 14.2%. That was welcome news for investors in light of FedEx's aggressive investments in the ground delivery business.

The freight business didn't produce such stellar results but showed signs of improvement. Revenue increased 3.6% year over year, while operating margin slipped from 8.2% to 8.1%. The net result was a modest year-over-year increase in segment income, from $132 million to $135 million.

Finally, TNT Express -- which operates as its own business segment for now -- produced $1.8 billion of revenue, but at a meager 1.9% adjusted operating margin. Still, FedEx knew what it was getting, as TNT Express is in the early stages of a multi-year turnaround plan.

Looking ahead

FedEx's Q1 results comfortably beat analysts' estimates on both the top and bottom lines. The good performance gave management enough confidence to raise the company's adjusted EPS outlook for the 2017 fiscal year by $0.10. FedEx now expects adjusted EPS of $11.85 to $12.35, up 10%-14% relative to fiscal 2016's $10.80.

FedEx also quantified some of its acquisition and integration costs for the first time. The company expects these items to reduce EPS by approximately $1 in fiscal 2017. However, barring any unforeseen complications, management expects TNT Express to start making a positive contribution to FedEx's financial results by fiscal 2018.

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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.