FedEx Earnings: Why Investors Weren’t Impressed by Good Numbers?

FedEx (FDX, -4.34%) trades lower even after FQ4 revenue and profit at yesterday's financial report comfortably beat market expectations. The company is often referred to as the overall economy’s weather vane, so its earnings releases can’t be missed.

We must add that elevated shipment rates are now associated with e-commerce, which is, in turn, considered a Covid beneficiary. In relation to this FedEx noted on their July '20 conference call a year ago that "several years of retail share gains have been compressed into a few months in the US with e-commerce as a percentage of US retail increasing from 16% in calendar '19 to 27% in April 2020."

Back to the Memphis-based shipping provider numbers, operating income rose 9% YoY to $1.97 billion QoQ and the company reported an operating margin rate of 8.7% vs. 5.2% a year ago and 8.9% consensus figure. We see here that for FedEx it will be harder to keep on track of this kind of enhanced performance – especially, if shipping rates are to slow down as world economies continue reopening.

The company reported Q4 net income of $1.87 billion, or $6.88 a share, compared to a loss of $334 million, or $1.28 a share, in the year-ago period. Adjusted for retirement-plan accounting and other costs, earnings were $5.01 a share. Revenue rose to $22.6 billion from $17.4 billion in the year-ago quarter. Consensus forecast called for earnings of $5.02 a share on revenue of $21.5 billion.

For the full year, FedEx reported net income of $5.23 billion, or $19.45 a share, on $84 billion in revenue. That compares with net income of $1.29 billion on revenue of $69.2 billion in the previous year and expectations of full-year earnings of $18.14 a share on revenue of $83 billion.

Across its business segments, FedEx Ground reported revenue growth of 27% QoQ. The revenue increase was explained by strong growth in B2B shipments and a 14% rise in unit shipping revenue.

FedEx Ground and FedEx Freight both posted record earnings for the quarter. But the company added that its operating results were “partially offset by costs to support strong demand, increased variable compensation expense, and higher labor rates.” The company’s management attributes the attained profit growth to “improved network optimization and asset utilization” whatever that means.

Looking ahead, FedEx sees EPS of $20.50 to $21.50 for the full year before the accounting and other adjustments vs. previous estimate of $20.48. The profit guidance is before MTM retirement plan accounting adjustments and excludes estimated TNT Express integration expenses and costs associated with business realignment activities.

Regrettably, FedEx said it is unable to provide an outlook for fiscal 2022 results on a GAAP basis because of inability to precisely forecast several essential costs, including ones attributed to its gargantuan retirement plan accounting impact.

Besides, the U.S. labor market has been tough for FedEx in recent months as workers demand more personal health security referring to “Covid-free working environment”, hurting the company’s hiring efforts and forcing turnaround decisions to deal with the growing shortage of employees. FedEx’s total operating expenses increased 23% from the year-before quarter, and that may be viewed as a single greatest concern of those investors who decided to sell the good news yesterday.

Nevertheless, the company’s shares are up nearly 17% year-to-date, and have gained about 125% annually. That nicely corresponded with still moderate investment valuations including P/E of around 25X and EV/EBITDA of around 12X. Having said that, we must agree that a lot will depend on the next quarterly earnings, where the most essential part will be the assessment of whether the company’s moderating shipping volumes would still outpace rising costs.