Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

FedEx just got a reminder that when it comes to guiding shareholders, more information is almost always better than less.

Shares of the package-delivery company shot up in late trading on Tuesday and continued their climb Wednesday morning after FedEx reported better-than-expected quarterly results and finally pulled back the curtain on how the integration of its $4.9 billion purchase of TNT Express is going.

The Power of Information
FedEx shares were trading higher after the company released better-than-expected quarterly results and shed some light on its TNT integration.
Source: Bloomberg

It wasn't so much what FedEx revealed about TNT -- though it did have some good things to say. But just the mere fact that the $46 billion company said anything after stonewalling most questions about the deal on its last earnings call came as a relief to investors. TNT wasn't profitable when FedEx agreed to acquire it and investors -- ever despising of uncertainty -- seemed to fear the worst. The reality isn't perfect, but it's not dire either and in the meantime, FedEx's core business is picking up the slack (more on that later). At the very least, investors know where things stand. 

Analysts were expecting that the acquisition would be dilutive to FedEx's earnings this year on a GAAP basis, but now we know the extent of it. Including integration and amortization expenses related to TNT, the company expects earnings per share of $10.85 to $11.35 for the fiscal year that began in June. That falls well short of the $11.67 midpoint estimated by Barclays analyst Brandon Oglenski ahead of FedEx's earnings report. So that's not ideal.

On the bright side, FedEx said that restructuring efforts are already starting to lower costs at TNT and that there haven't been any major surprises yet as far as integration expenses. The company is expecting $700 million to $800 million of costs during the four-year integration process, but it's also targeting $750 million in annual savings. RBC analyst John Barnes notes that the synergy number works out to about $1.80 a share, higher than the $1.40 that was initially expected. As more of those benefits start to take hold in fiscal 2018, the TNT purchase should start to be accretive. 

It also helps that the rest of FedEx's business is -- for the most part --flourishing. Excluding TNT-related costs, the company is now forecasting earnings per share of $11.85 to $12.35 this year, compared with guidance of $11.75 to $12.25 in its last earnings update. One of the bigger concerns about the TNT acquisition was that the distraction of fixing that business would undermine the performance of FedEx's core operations. This boosted outlook amid some heavy lifting at TNT should silence the naysayers, at least for a little while. 

Operating profit at all three of FedEx's main operating divisions -- Express, Ground and Freight -- beat RBC's estimates, a reflection of ongoing cost-cutting efforts and surging revenue on the back of the e-commerce boom. It's because of those trends that even with the dilutive impact of the TNT acquisition, FedEx's adjusted earnings per share will rise above last year's level. That's particularly impressive considering the company lowered its forecast for economic and industrial growth yet again this quarter. It now expects a 2.2 percent rise in global GDP this year and a 0.7 percent drop in U.S. industrial production. 

Downshifting
FedEx's outlook on the economy has been getting gloomier.
Source: Bloomberg

FedEx isn't off the hook just yet. By its own admission, the company still has a ways to go to fully integrate TNT and will need to make significant investments to upgrade that business's IT systems. Investors will be watching its future earnings reports carefully for more signals as to how that's progressing. But for now, there seems to be enough information flow and enough good news to keep them satisfied. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. This still excludes mark-to-market pension adjustments. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net