The narrow-moat shipping giant reported excellent fiscal first-quarter Express and Ground results despite relatively stagnant global economic growth.
By Keith Schoonmaker, CFA | 09-21-16 | 02:00 PM | Email Article

Ramping up the TNT Express integration has not diminished the Express improvement trajectory.  FedEx  reported excellent fiscal first-quarter Express and Ground results despite relatively stagnant global economic growth. Management increased fiscal 2017 EPS guidance by a modest dime on both ends to $11.85-$12.35 excluding TNT integration costs and pension adjustments, but this increase reflects management’s tone on the analyst call, which was as positive as any we can recall from this experienced team.

Keith Schoonmaker, CFA, is director of industrials equity research for Morningstar.

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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Keith Schoonmaker, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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