Solid Pricing and Express Execution Lift FedEx

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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