A Fair Value Hike for FedEx

Solid pricing, volume, and execution mark

FedEx grew total revenue 10% year over year, improving volume in two segments and pricing in three. Express volume was flattish, but pricing improved 8%. Ground and freight were both healthy, with the former up 6% in both volume and revenue per package, and the latter growing 6% in shipments and 8% in revenue per shipment. Excluding fuel, yield per shipment was up 3% in express, 5% in ground, and freight revenue per shipment was up 6%--all quite healthy, in our view.

Express' normalized operating margins slid 170 basis points year over year,to a mere 5.4% due to weather challenges, TNT integration costs, high peak season costs, and variable compensation accruals. Ground improved operating margin by 110 basis points to 12.1% on rate gains and volume leverage, constrained by variable compensation and network expansion costs; EBIT improved 23%. Freight operating margin was a (typical for third quarter) low 3.2% despite gains in shipments and pricing. Management shared fourth-quarter segment margin expectations that are high but in line with our full-year expectations: Express 9.1%-9.6%, ground 17.0%-17.5%, and freight 8.0%-9.0%.

The quarter met our general expectations, but volume and price were stronger than we anticipated. We believe margins will continue to advance in both express and ground as the firm continues to invest in automation and refleeting, as well as in TNT improvements.

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