FedEx Delivers a Gift to its Stockholders

The Christmas season is when FedEx Corporation (FDX) delivers gifts to people around the world. This year, the company had a gift for its shareholders: strong earnings.

After the market closed on Thursday afternoon, the Memphis, Tennessee company reported a second-quarter operating income of $1.6 Billion, an 11% jump from last year, beating analyst estimates. In addition, the company announced a new $5 Billion Share Repurchase Program Authorized, including a $1.5 Billion Accelerated Share Repurchase Program.

Share buybacks are usually a good thing for stockholders. This is because they reduce the number of shares floating in the market, pushing the price of these shares higher.

I am bullish on this stock.

A Big Turnaround

FedEx’s solid Q2 performance was a big turnaround from its Q1 results, when the company missed Wall Street estimates due to labor shortages and network inefficiencies. As a result, according to the company report, they cut FedEx’s first-quarter operating income by $450 million.

Management credited the company’s solid Q2 performance to the hard work of its teams. “Our operating income increased during the quarter, thanks to the enormous efforts of our team members. We are nearing the finish line of another robust peak shipping season, and we salute our more than 600,000 team members worldwide for their dedication in delivering the holidays to our customers,” said Frederick W. Smith, FedEx Corp. Chairman and Chief Executive Officer.

Michael C. Lenz, FedEx Corp. Executive Vice President and Chief Financial Officer, elaborated on some factors that helped the express package transportation and delivery company turn things around.
“FedEx operating income grew in our second quarter, driven by strong revenue growth and effective management of our cost and expected labor availability challenges,” he said. “While adjusted earnings per share were unchanged year over year, this year’s effective tax rate was significantly higher, as last year’s earnings included a $0.71 per share tax benefit.”

Meanwhile, Raj Subramaniam, FedEx Corp. President and Chief Operating Officer, emphasized the role of strategic investments in the company’s turnaround. “Strategic investments that we have made to our networks and systems have enabled us to provide critical delivery capacity and supply chain expertise to support the needs of our customers, while also making it possible for us to capitalize on the growing e-commerce parcel market,” he said.

But there’s another critical factor that management failed to mention: a 5.90% shipping rate hike across most of its services. Announced last quarter, this was the first such significant increase in ten years, made to deal with the higher labor and supply chain costs.

FedEx has been able to hike prices, as its customers don’t have that many alternatives to ship their products. In addition, the industry is an oligopoly, consisting of UPS (UPS), U.S. Postal Services, and FedEx, a situation that gives each company a great deal of pricing power.

Wall Street’s Take

Wall Street likes what it saw in FedEx’s Q2 report. As a result, it sent its shares sharply higher in after-hours trade on Thursday afternoon. Still, FedEx’s shares have lost around 5% year-to-date, compared to a 22.67% gain in UPS shares and 25.32% gain in the S&P500 (SPX).

Analysts’ Take

FedEx has a broad analyst following, which does not seem to share Wall Street’s bearish sentiment. As a result, analysts rate the company’s shares a Strong Buy, with an average FedEx price target of $311.67, a high forecast of $369.00, and a low estimate of $260.00. The average price target represents a 24.5% change from the last price of $238.52.

Obviously, analysts consider FedEx’s price drop temporary, given its dominant market position and the nature of the express package transportation and delivery industry, which allows the company to pass higher costs on to its customers. And judging from the company’s Q2 report, they have been right.

Disclosure: At the time of publication, Panos Mourdoukoutas had a position in FedEx and UPS.