Positive News at FedEx

Ramping up the TNT Express integration has not diminished the Express improvement trajectory.

Express improved average daily parcel volume 1% and total parcel yield was flat, but express freight tonnage increased 8%. Excluding fuel, yield per package expanded 2.5% year over year in domestic Express and 1.4% in international. Express increased operating margin excluding TNT integration costs 140 basis points to 9.7%. Ground grew volume a steep 10% and increased yield 3% excluding fuel; Ground operating margin was 14.2%. Ground has gained market share for 17 consecutive years, and the company continues to focus 2017 capital expenditures on Ground terminals. Freight grew daily shipments 8% year over year, but revenue per shipment declined 1.7% even ex-fuel; EBIT margin was 8.1%. Our full-year revenue and margin projections for Express and Ground are a bit below first-quarter results, but we maintain our fair value estimate and narrow economic moat rating.

Management supplied greater detail on $700 million-$800 million in expected total costs and $750 million in annual synergies from the four-year TNT integration effort. We incorporate this into our model, but do not expect to materially adjust our current TNT assumptions absent additional information. TNT delivered $1.8 billion in revenue and a $14 million operating loss in the period, but excluding restructuring and intangibles amortization TNT generated about 1.9% positive op margins. We currently model TNT margin improvement from loss-making this fiscal year to 3%-4% operating margins by fiscal 2019-20.

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