FedEx Impairs Significant GENCO Goodwill
We're maintaining our fair value estimate and narrow economic moat rating for the firm.
FedEx (FDX) announced that it will take a total asset-impairment charge of $380 million in its fiscal fourth quarter ended May 31. Because this is a noncash charge, we maintain our fair value estimate. We also maintain our narrow economic moat rating.
Most of these impairments ($374 million) are reductions in goodwill related to the January 2015 acquisition of GENCO Distribution, now designated FedEx Supply Chain. This business specializes in reverse logistics, or handling returns. The company indicated that impairments follow the underperformance of Supply Chain during fiscal 2018 (especially in the fourth quarter), including erosion in its base business during fiscal 2018 and failure to reap operating synergies, resulting in falling short of the revenue and profit growth expected when the business was acquired. Most of the $1.2 billion of goodwill recorded upon acquiring GENCO was allocated to other reporting units and is unimpaired. FedEx paid $1.4 billion for GENCO, which generated $1.5 billion of revenue in fiscal 2017.
FedEx indicates that during the fourth quarter of fiscal 2018, it reorganized Supply Chain and other specialty services businesses under FedEx Trade Networks, and an improvement plan is underway. Also, the company is moving the reporting of GENCO financial results from the Ground segment to Express; based on the critical commentary in the press release announcing the impairment, we expect this will elevate Ground margins and slightly suppress Express profitability (will probably constitute less than 5% of Express revenue).
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Keith Schoonmaker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.