FedEx smokes its Q2 earnings guidance by 15%

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FedEx also increased its F18 forecast

Tuesday afternoon on a Q2 F18 earnings call with investors, FedEx reported a higher-than-expected earnings-per-share figure of $3.18, besting the analyst estimate of $2.89 by 29 cents. These earnings came on revenue of $16.31B, beating the consensus estimate of $15.68B. FedEx’s operating margin was 8.5%, up 30 basis points year-over-year. In the earnings presentation, FedEx executives chalked up the company’s impressive performance to “higher base rates, volume growth, and a favorable net impact from fuel at each transportation segment.”

“We are increasing our fiscal 2018 forecast, due to enhanced revenue quality, solid demand trends and our success in restoring business impacted by this summer’s cyberattack,” said Alan B. Graf, Jr., FedEx Corp. EVP and CFO. “We expect to see improved results in our fiscal second half, and we reaffirm our commitment to improve operating income at the FedEx Express segment by $1.2 to $1.5 billion in fiscal 2020 versus fiscal 2017.”

Both FedEx Ground and Freight divisions saw double-digit revenue growth from Q2 F17. FedEx President and COO David Bronczek reported that the company’s recovery from the NotPetya cyberattack, which shut down FedEx’s TNT Express unit in Europe and cost FedEx $300M, had been completed with improved security and reliability. 

“How are they getting there? We all know about e-commerce and how it continues to blow and grow,” said Donald Broughton of Broughton Capital on CNBC this afternoon. “They continue to make service happen without any interruptions… But what’s really key here is—look at the margins on Express—that’s 11% margins, record-high margins. All the billions of dollars they’ve invested in technology, sortation, brand-new airplanes, is really starting to pay off, not only in efficiency and capacity so they can get that service, but they can deliver really solid margins to the bottom line,” Broughton said. 

Particularly impressive was the improving margins in some of FedEx’s smaller divisions. Broughton continued, “And remember, the highest margin business for them historically has been ground, it’s been the other parts of the business, which are smaller revenue. The big revenue is still Express and when Express starts to deliver 11%+ margins, then guess what? You get what we just got, which is a beat and a raise.” FedEx stock lurched up 2% in after-hours trading, and Broughton pointed out that the tax reform bill making its way through Congress this week will enhance the carrier’s earnings outlook yet again.

“Strategic execution by the FedEx team and a stronger global economy drove improved financial results, and we are well positioned for profitable, long-term growth,” said Frederick W. Smith, FedEx Corp. chairman and CEO. “We are on track for another record holiday-shipping season, and customer-service levels have been outstanding.”

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