FedEx Needs More Than Just a Good Quarter

There are a couple reasons to feel good about FedEx's (NYS: FDX) stellar third-quarter numbers. After all, the company more than doubled its profits compared to last year. Furthermore, FedEx was able to pass on high fuel costs to customers without seeing a significant drop in business. A closer look at the recent developments paints a broader picture, however.

Shifting and shuffling, but remaining profitable
FedEx saw a slight shift in consumer trends this quarter, as some clients preferred using their ground shipping services instead of the more expensive express shipping services. This resulted in a 4% decline in daily package volume in the express segment, the largest contributor to revenue. However, the fall was comfortably offset by higher pricing that led to the segment raking in 8% more revenue compared to the year-ago period.

On the other hand, revenue from FedEx's ground shipping business climbed 14%, helped by better volumes in its home delivery and B2B segments. A sharp rise in online shopping, boosted by a record holiday season, meant more home delivery orders. At the same time, the already-high rates resulted in revenue per package -- a key metric to measure profitability -- improving by 8%. The company also attributes the increased customer preference for FedEx's ground shipping services to greater efficiency (which translates to improvement in delivery time).

On the whole, FedEx's quarterly sales grew by 9% to $10.56 billion. The company posted adjusted earnings of $1.55 per share, comfortably beating analyst expectations of $1.35 per share.

Some points to ponder
Europe remains an area of concern, though. The recent acquisition of Dutch package delivery company TNT Express by shipping giant United Parcel Service (NYS: UPS) , a key industry rival, is sure to strike a blow to FedEx's European business down the road. FedEx has a 3.3% market share in Europe and efforts to expand its European ground delivery and express businesses could get difficult. While we need to wait for further long-term ramifications, FedEx remains confident and plans to continue to grow organically in that area while keeping another eye fixed on Asia.

High fuel costs have also been a point of concern for the company. FedEx is upgrading its fleet of aircraft, including ordering more fuel-efficient ones, to counter these costs. The fact that FedEx managed costs very well this quarter has been reflected by a better operating margin that increased to 7.7% from 4.1% last year. But can the company sustain it?

The Foolish takeaway
While the UPS-TNT deal removes one large player from the picture, it also creates a more formidable competitor in UPS. Perhaps FedEx will take a cue from the recent deal and develop a strategy to move into new markets in a similar fashion. While the company's global infrastructure is enviable, FedEx will need several tools to leverage the economic recovery to its advantage. While I think the prospects for FedEx are promising, it's a story I will continue to watch closely to further develop my thesis.

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At the time thisarticle was published Fool contributor Navjot Kaur does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of FedEx. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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