FedEx Tripped Up by Ground as It Gears for Growth

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Demand and price were strong in most segments, but particularly in Ground, which increased average volume 5% and expanded yield 4%. Robust revenue makes margin compression all the more unexpected. Costs increased in purchased transportation, rent, depreciation, building insurance, property tax, and staffing ahead of opening four major hubs and 19 automated stations. The firm made 69 relocations and executed 185 facilities-related projects this year. Management believes margins will improve during the second half of the year, and in coming years as Ground facilities leverage volume. Growth would have been greater had management not discontinued relationships with customers with which it could not agree on pricing and capacity for peak season. This discipline bodes well for future margin improvement, in our view.

TNT integration continues, and the firm will give a more thorough update in March. Management maintains its estimate of $500 million total capital expenditure needed to invest in TNT, and post-2020, $750 million of annual synergies. Management maintained fiscal 2017 EPS guidance of $11.85-$12.35 excluding TNT integration costs and mark-to-market pension adjustments.

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