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Fedex to deliver solid figures

FedEx will report its second quarter figures on Wednesday 17 December, and is anticipated to reveal a 24% jump in earnings. 

Fed Ex depot
Source: Bloomberg

FedEx’s business in firing on all cylinders, as the company’s freight, express and ground delivery divisions are experiencing an increase in volumes, freight being the best performer. The courier company is reaping the rewards of a restructuring plan that begun two years ago – since then 3600 voluntary redundancies have been undertaken.

The shipping of e-commerce products is the standout service, and the company is reshaping its airfleet unit to ensure it captures a larger share of the market. The firm is acquiring new airplanes for the purpose of fuel efficiency, and the recent collapse in the price of oil should help bring costs down in the division.

Problems ahead?

A change in how US tech companies launch their products could pose a problem for firms like FedEx, however, as we are now seeing more products being shipped to the US from Asia well ahead of the launch rather than being flown closer to the release date. If this trend continues FedEx could struggle to keep its freight revenue growing at double digit rate.

FedEx has been given the green light to expand its business in China, but with the slowdown in the country this means the expansion may not be as fruitful as initially planned. During the summer, DHL Express announced its exit from China as competition from domestic firms was tough. FedEx should be careful not to tie up too much capital in the expansion.

The run up to Christmas will see the employment of 50,000 seasonal workers, a 20% increase on last year’s figure, but I wonder how popular will FedEx be in the New Year when the company increases in charges on express, ground and home deliveries. The announcement of higher fees comes at a time when the US postal service is reducing some of its charges; this could squeeze FedEx’s domestic market.

Expectations for Q2

FedEx will report full-year numbers in June 2015, and dealers are anticipating revenue of $47.95 billion and EPS of $9.01. These expectations equate to a 5% rise in revenue and a 33% jump in EPS. The company reiterated its full-year forecast when the first-quarter numbers were released in September.

Q1 figures easily exceeded expectations. Revenue came in at $11.7 billion and EPS was $2.1, while analysts were expecting $11.46 billion and $1.96 respectively. FedEx will announce its Q2 figures on Wednesday 17 December, and the consensus is for revenue of $11.97 billion and EPS of $2.17. Last year’s Q2 revenue and EPS were $11.4 billion and $1.57 respectively.

Equity analysts are bullish on the stock, and out of the 31 recommendations, 16 are buys, 14 are holds and one is a sell. The average target price is $180.13 which is only just above the current share price. Analysts are more bullish on United Parcel Service, on which there are 14 buy recommendations and 17 hold ratings. The average target price is 2% above the current price.

Since Q2 numbers were released, the number of short positions on the stock has declined by 11.5%. As the share price climbed to new highs the short interest on the stock has fallen to its lowest level for the year.

A good set of numbers could help drive the stock to $190, but if expectations are missed the stocks could drift back to the $172 region which would fill the gaps that were created in recent weeks.

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