3 Reasons FedEx Could Beat Expectations This Year
Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
The Federal Reserve's monetary policy committee concludes its two-day meeting today, and the market will be fixated on whether policymakers decide to scale back the central bank's $85 billion in monthly bond purchases. In that context, stocks opened slightly higher this morning, with the S&P 500 and the narrower Dow Jones Industrial Average up 0.20% and 0.39%, respectively, at 10:12 a.m. EST.
With all eyes on the Fed, expect fundamentals to take a back seat today -- and that's precisely why I'm taking the opportunity to highlight a fundamental story in FedEx's results for the fiscal second quarter ended Nov. 30 (i.e., part way through the crucial Thanksgiving holiday shopping weekend.) Let's get the headline numbers out of the way: FedEx missed Wall Street expectations with earnings per share of $1.57 versus a consensus estimate of $1.64, according to the quarterly report released this morning. That may end up weighing on FedEx shares today -- they opened down 0.7% at a.m. EST.
Should that be the case, it looks shortsighted for a number of reasons.
First, revenue was exactly in line with the consensus estimate at $11.43 billion. Furthermore, the delivery specialist is committed to boosting its operating margin to 10% in the medium term from 7.2% in the prior fiscal year. The related cost-cutting exercise has already born fruit: the company's operating margin in the last quarter was 7.3%, up from 6.5% in the year-ago quarter.
That margin improvement program is ongoing and there is reason to believe further progress is attainable. On Monday, in reiterating its buy rating for FedEx and raising its price target from $135 to $183, Deutsche Bank wrote:
We believe FDX represents a unique investment story (a large cap that can drive above-average earnings growth due to a self-help story) with operating leverage to a potential global economic recovery. We expect that FDX should begin to realize the benefits of its workforce reductions and various profit improvement initiatives at Express during CY2014...
Second, while FedEx may have shown an earnings miss, it raised its guidance for earnings-per-share growth for the full fiscal year to 8% to 14% (from 7% to 13% previously). There is potential upside to this number, too, as it does not account for any additional share repurchases. Note that the top end of the new guidance range gets us to $7.10 in EPS for fiscal 2014, which is ahead of the current Wall Street estimate of $7.03.
Finally, operating margin in FedEx's second largest segment, FedEx Ground, fell to 14.9% from 15.9% due to the calendar. As the company explained in its earnings release:
Operating margin declined primarily due to this year's later start of the holiday shipping season, as Cyber Week occurred in December this year versus November last year. The seasonal increases in volume, revenue and operating income related to Cyber Week will be realized in this year's third quarter versus the second quarter last year.
As such, FedEx -- and its shareholders -- could still see some holiday cheer in the next quarter.
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The article 3 Reasons FedEx Could Beat Expectations This Year originally appeared on Fool.com.Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool 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.
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