FedEx (FDX) grew normalized fiscal fourth-quarter EPS by a strong 29% chiefly due to the TNT Express acquisition, strong pricing in all segments, decent volume growth, as well as continued excellent Express margin performance. The firm improved yield by 7% in domestic Express (4% excluding fuel), 2% in international export package (flat ex fuel), 7% in Ground (6% ex fuel), and 6% in Freight (4% ex fuel). Volume grew 30 basis points in domestic Express, 5%-6% in international packages, and 3% in Ground; Freight shipments were flat. We maintain our narrow economic moat rating and expect to make no material increase to our fair value estimate.
We’ve long said FedEx and UPS need to get paid for accomplishing the near impossible. We thought the firm might announce pricing changes alongside earnings, and still expect that before November it will implement peak season surcharges similar to what UPS just put in place, but management shared no details at this point. We would not be surprised if FedEx Ground took additional price action on oversize and overweight package rates, given the requisite greater manual effort, and past-year acceleration of these deliveries less conducive to automated processing (consider mattresses, window blinds, exercise equipment, and so on). Price action will help, no doubt, but normalized EBIT margins already were quite solid in this period: Express was an impressive 12.7% (from recent fourth-quarter lows of 6.0%-6.5% in fiscal 2011, 2012, and 2013); TNT was 4.4%; Ground was 15%; and Freight was 7.8%.
Capital expenditure exceeded cash from operations by nearly $200 million, reflecting the heavy investment still under way in aircraft refleeting, Ground capacity expansions, and TNT facility and technology improvements. After investing $5.1 billion in fiscal 2017, the firm expects to invest another $5.9 billion in 2018. We believe FedEx’s free cash flow days are at least another year away due to the large profit enhancements in progress.
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Keith Schoonmaker, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.