Analysts had high expectations for FedEx’s fourth-quarter margins after chairman and CEO Fred Smith gave forward-looking statements in March that “the fourth quarter is going to be gangbusters.”
Whether or not it was “gangbusters” is up for debate, but FedEx announced a strong fourth quarter in an optimistic June 19 earnings call.
The company collected $17.3 billion in revenue in Q4, just scraping past analyst predictions of $17.25 billion. That’s growth of about 10 percent from the same quarter a year earlier.
Most importantly for shipping-based companies, FedEx said that combining TNT Express and the FedEx Express Segment will be one of its primary areas of focus in 2019.
The company will see more volume next year, executives said. But — no surprise here — the company also plans to raise rates.
“It was a year of opportunities and challenges — anticipated and unexpected—and FedEx emerged more competitive than ever,” Smith said in a statement in advance of the call. “In all my years at FedEx, I have never been so optimistic and so sure of our strategy and our ability to deliver an exciting future.”
FedEx Earnings: Q4 By The Numbers
Here’s what FedEx revealed about its fourth quarter, which ended May 31, during that earnings call.
First, the company collected $17.3 in revenue. That’s long-term growth of about 10 percent year over year and a slight beating of analysts’ predictions. Revenues grew as a result of higher rates, more volume and low fuel prices, but the company said growth was limited by wage increases.
FedEx reported Q4 operating income of $1.49 billion or $2 billion when adjusted to exclude tax liabilities and other externalities. That metric grew by about 10 percent year over year, on par with revenues.
Profits spiked in 2018. FedEx posted a reported a net income of $1.13 billion or adjusted net earnings of $1.6 billion. That’s about 40 percent higher than the previous year.
Rising profits were driven by benefits of Congress’s recent tax overhaul — the company said the Tax Cuts and Jobs Act resulted in a $1.6 billion tax benefit for them — as well as rising rates and volumes.
While company leaders touted that legislation as a boon to their business, CEO Smith has railed against protectionist trade policy. President and COO David Bronczek alluded to new tariffs in the call, telling investors that even if a “trade war” emerges, the company would be able to adjust.
FedEx’s diluted earnings per share were reported at $4.15 and its adjusted earnings were $5.91. Analysts predicted earnings of $5.71 per share in advance of the call.
For comparison, UPS collected $17.1 billion in revenue in Q1 of 2018, also growing about 10 percent year over year. UPS posted about $1.3 billion in profits.
In 2017, analysts estimated that UPS’s brand was worth $22 billion, while FedEx was worth $18.2 billion. But UPS’s value shrunk in 2017, and FedEx’s only crept up by a fraction of a percent. Shipping’s two leading companies remain neck and neck for industry dominance.
FedEx Sets Growth Target For 2019
There are many headwinds in the shipping industry right now — fuel and labor costs, the looming threat of Amazon and seemingly unstoppable consumer expectations for faster service. But FedEx chose to focus on a few tailwinds in its earnings call.
First, the company said, it benefited in 2018 from an increase in industrial production. The company predicts that sector will grow 3.8 percent in the coming year — not leading FedEx’s growth, but certainly feeding it.
For the 2019 fiscal year, CEO Smith said FedEx is targeting revenue growth of about 9 percent — slightly slower than 2018, but not by much.
Second, while UPS is upping its capital spending during a three-year “transformation plan,” FedEx plans to keep its steady or even cut it back. The company spent about $5.7 billion in capital expenditures in 2018, Smith said. That’s worth about 8.7 percent of revenues. In 2019, Cook wants capital spending to drop to 8 percent of revenues.
Additionally there will be new pension accounting rules launching in fiscal 2019. These pension accounting rules will impact operating margin but will not impact earnings per share or net income.
Finally, FedEx is in the midst of merging TNT Express with its existing FedEx Express. Right now, the merger is costing the company money (albeit bringing in some tax benefits). But FedEx says it aims to “improving operating income at the FedEx Express segment by $1.2 to $1.5 billion in fiscal 2020 versus fiscal 2017.”
In fiscal 2018, FedEx Express brought in $990 million in operating income. If executives’ predictions are correct, this merger will double the size of that service.
On the other hand, the FedEx Freight Segment reported a revenue of $1.86 billion and an operating income $175 million.
Mickey Foster, the Vice President of Investor Relations for FedEx opened the call reminding guests that the earnings release is available on their website and anyone who has questions is encouraged to email them at firstname.lastname@example.org.
What does this mean for shipping-based companies?
No executive should be surprised that FedEx plans to raise rates next year. So do UPS, DHL and every other player in the industry. Base rates rise by about 4.9 percent each year, if 2019 follows recent history.
But accessorial fees like fuel surcharges and surcharges targeting certain packages, like oversize and overweight parcels, are where carriers really make their margins, especially in peak season. Conveniently for carriers, they’re also the hardest rates for shippers to understand.
As you prepare to examine your carrier’s new rate sheet this fall, make sure you know exactly what your company ships, where it goes, and what kind of service you need.
If you use FedEx Express or TNT express, review that portion of your shipping data closely. The better you know what services your company uses, the easier it is to understand how service shifts and rate increases will affect your bottom line.
Need help getting started? Enlist a trusted partner, like Reveel, to help you review your shipping profile and existing contract and spot areas where you could save in 2019.