Industrials

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

Welcome to Mr. FedEx Corp.'s Wild Ride.

The parcel-delivery giant reported its results for the peak holiday quarter after the close of regular trading on Tuesday. Adjusted earnings per share in the period massively missed even the lowest of analysts' estimates. FedEx now expects fiscal year 2017 adjusted EPS -- including the results of the TNT Express business it acquired last year -- to be $10.80 to $11.30, down from an earlier forecast of $10.95 to $11.45. Excluding TNT integration expenses, which are set to rise by $50 million this year, the company kept its earnings forecast the same.  

Track Record
Going into the third-quarter release, FedEx had beaten analysts' earnings estimates four out of the last five times
Source: Bloomberg

The shares initially dropped more than 4 percent in after-market trading following the 4:15 p.m. release. But as FedEx held a conference call to discuss its results, the stock reversed its declines and then some, settling in for an increase of about 2 percent as of 6 p.m. in New York. What gives?

The earnings disappointment was driven by a confluence of negative factors including higher expenses associated with the company's effort to expand its network to handle the surge in e-commerce shipments. Among the larger impacts, FedEx on the call cited a 30 percent year-over-year increase in its fuel costs, adding that a planned change to how it uses fuel surcharges should help smooth out future volatility. Investors seemed to take comfort from that reassurance -- but there was something else to make them feel even better.

Turning a Corner?
After years of profit pressure on e-commerce shipments, FedEx appears to be getting a handle on margins
Source: Bloomberg

One key question for FedEx going into Tuesday's results was whether margins in its ground segment -- the part of its business that handles a lot of the e-commerce traffic -- had bottomed out, or if the profitability pinch would get worse. FedEx trucks bound for people's homes typically only drop off one package at a time and have to make more frequent stops, making e-commerce shipments to consumers a less profitable operation for the company than business-to-business outlays. But FedEx has been investing heavily in its network and automation technologies in an effort to bring costs down. It's looking like that effort is paying off.

Margins at the ground segment were 11 percent in the third quarter, compared with 10.5 percent in the second. In the final stretch of the year, FedEx expects margins of more than 15 percent for that part of its business. Perhaps even more meaningfully, the company reduced its capital spending forecast for the year by $300 million and CEO Fred Smith said he doesn't expect much variance in the spending outlay over the foreseeable future.

Pickup Time
FedEx had to lower its outlook on the economy throughout last year, but as of December it was expecting things to improve in 2017
Source: Bloomberg

Compare FedEx to United Parcel Service Inc., which had a big miss in its holiday quarter and is now ramping up capital spending to better deal with the e-commerce crush. Whatever other obstacles FedEx may face, it's further along the road.

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

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