FedEx's Unusual Quarter Contains Promise

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Package delivery company FedEx Corporation (NYSE: FDX) delivered a mixed set of earnings that raised as many questions as it provided answers. There's a lot going on in the company's revenue and earnings trends, so let's take a closer look and decipher what happened in its recent report.

FedEx Corporation's third-quarter earnings: The raw numbers

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Let's start with the headline numbers from the three main segments in the third quarter:

Express took a hit

The third quarter contains the crucial holiday period in which FedEx and rivals such as United Parcel Service can experience dramatic shifts in profitability due to the inherent uncertainty in the timing of peak delivery days and the volume that occurs on these days. UPS' results were negatively impacted by increased costs needed to support its network, as volumes came in higher than expected during peak days.

FedEx also was impacted, but the express segment bore the brunt of the difficulties, which was unusual. CFO Alan Graf said, "Service levels at Express were excellent during peak; however, costs were impacted by lower-than-expected volumes during the first part of December and higher peak-related costs."

Ground and freight performed well

As you can see in the table above, it was a mixed quarter, with the express segment disappointing and the ground segment delivering a strong performance. This represents somewhat of a reversal of fortune. In previous quarters, the revenue and margin expansion at express drove profit improvement.

Meanwhile, the ground segment was impacted by margin challenges, which meant that its strong volume growth didn't fall into profitability in the way that many investors had hoped.

No matter. FedEx ground delivered a strong performance in the quarter, and operating margin in the segment expanded to 12.1% compared to 11% in the same quarter of last year. Moreover, a combination of 5.5% growth in average daily package volume was accompanied by a 6.4% increase in yield. As you can see below, FedEx's pricing actions are leading to good increases in yield, while volume growth is also strong and operating margin is finally turning in the right direction -- a good quarter for the ground segment.

In common with UPS, FedEx reported a strong quarter in its freight operations. It's a direct consequence of an improving economy, and a look at the trucking sector suggests that the freight market is going to remain strong for at least the rest of 2018.

What's next for FedEx?

The difficulties caused by the peak delivery season came through in the express segment this year. However, the company otherwise has been performing well, so investors have reason to feel confident for the future. Meanwhile, the improvement in ground margin is a sign that FedEx is starting to tackle the issue of ensuring that e-commerce volume delivery growth is accompanied by margin improvement.

Going forward, investors will want to see ground margin continue to improve, while looking for the underlying strength of express to shine through.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends FedEx. The Motley Fool has a disclosure policy.