FedEx Still Delivers, but Packages Lack Punch

Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s a marvel that a company the size of FedEx (NYSE: FDX) that does business on seemingly every continent can still grow – albeit in the low single digits. For that, the company deserves a lot of credit. Plus it’s also hard to disparage the considerable amount of value that exists in the company’s assets. The problem is, it means very little in terms of stock performance. So what's the point?

For this reason, making FedEx an integral part of a long term position has always been difficult. I just don't see the justification. What’s more, over the past several quarters, the company has not been able to convince investors that it knows where the premiums are going to come from. And the company’s second quarter earnings results presented more doubt as to whether or not it ever will.

The Quarter That Was

One can't fairly assess FedEx’s results without mentioning the adverse impact of Hurricane Sandy. The storm was said to have hurt FedEx’s EPS results by at least 11 cents. So although FedEx missed slightly on its bottom line, the market appreciates the difficult environment in which the company operated.

With that in mind, the company reported earnings of $1.39 per diluted share on revenues of $11.1 billion. Profits dropped 11% year-over-year while revenues climbed 5%. As noted, I’m willing to give FedEx a pass on its EPS numbers, particularly since the company beat EPS estimates by 5 cents in Q1. But that’s where my pardon ends.

On the other hand, profitability was a disappointment. Operating income shed 8% year-over-year to $718 million as operating margins dropped almost one full point to 6.5%. Similarly, net income arrived at $438 million, which was almost 12% lower than the same period a year ago.

These numbers are certainly disappointing. Still, they stack up pretty well when compared to rival, UPS (NYSE: UPS), which recently reported both EPS and revenue that failed to meet analysts’ expectations, including sales declines of 0.7%. Also, UPS’s net income of $469 million represented a 56.3% decline year-over year. 

Moving Forward

On a relative basis, it’s hard to appreciate FedEx’s performance, particularly, in light of the storm, which also hurt the company’s volume. For that matter, volume wasn’t all that bad. The company’s Express segment logged an international growth volume of 6%. In the past, this has been an area of struggle due to fiscal challenges overseas.

Nonetheless, 2% volume decline in the U.S. remains a drag. But the company expects some improvement going forward. I just worry that it might not be enough.  For the third quarter, FedEx expects earnings to arrive between $1.25 to $1.45 per share. The company also reaffirmed earlier forecasts for the full fiscal year of $6.20 to $6.60 per diluted share.

With all things considered, I can appreciate why some analysts want to give FedEx a “pass” on this report. I have seen other companies get punished for even slightly better numbers than what FedEx provided. But on the other hand, the company has earned this level of respect. It just doesn’t mean that the stock is a good investment at this point.

Bottom Line

The good news is that FedEx does appear committed to a restructuring plan and management is looking for ways to reduce costs while improving asset consumption. But these are never easy to execute, particularly for a company the size of FedEx. Nonetheless, it is encouraging that the company understands that it needs to do something.

In the meantime, I don’t see a scenario where the stock is going to move in a meaningful way. In my opinion, FedEx would be better served exploring ways to generate the sort of free cash flow needed to make the stock attractive. This quarter proved that FedEx is a good company with great management. It also proved that the stock should be avoided – at least for now.

rsaintvilus has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend FedEx and United Parcel Service. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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