The May 2016 acquisition of a Dutch courier service, now the second-largest in Europe, is starting to pay off for FedEx Corp. while it builds new facilities to ensure it can take full advantage of the rise in online shopping.
FEDEX CORP. (New York symbol FDX; www.fedex.com) delivers packages in the U.S. and 220 other countries. Its fleet of 150,000 trucks and 650 aircraft handle 14 million packages a day.
FedEx’s revenue rose 18.0%, from $42.7 billion in 2012 to $50.4 billion in 2016 (fiscal years end May 31). Those gains are largely due to more businesses using its just-in-time delivery services to cut their inventory costs and speed up manufacturing. The strong growth in online shopping volumes also contributed to the higher revenue.
The company’s earnings fell 5.4%, from $6.59 a share (or a total of $2.1 billion) in 2012 to $6.23 a share (or $2.0 billion) in 2013. That’s partly because it decided to retire some of its older planes earlier than originally planned.
Earnings then rebounded to $6.75 a share (or $2.1 billion) in 2014, and rose to $10.80 a share (or $3.1 billion) in 2016.
The company’s earnings also benefitted from its May 2016 acquisition of TNT Express NV. That Netherlandsbased courier operates across Europe. FedEx paid $4.9 billion for the business, and it’s now the second-largest courier on that continent after United Parcel Service.
Thanks in part to the TNT purchase, FedEx’s revenue for its fiscal 2017 third quarter, ended February 28, 2017, jumped 18.5%, to $15.0 billion from $12.7 billion a year earlier. TNT accounted for $1.8 billion of that increase. Higher shipping volumes and prices also contributed to the rise. If you exclude costs related to the TNT purchase and other unusual items, the company earned $638 million in the quarter. That’s down 7.8% from $692 million a year earlier. Due to fewer shares outstanding, earnings per share declined 6.4%, to $2.35 from $2.51.
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Growth stocks: Improved computer systems at TNT could add $1.5 billion
FedEx continues to build new package-sorting facilities to handle rising volumes as more people shop online. Its fuel costs also rose 36.9% in the quarter. Those factors combined to lower the company’s earnings.
FedEx had to borrow the cash it needed to buy TNT. As a result, its long-term debt jumped from $7.2 billion at the end of fiscal 2015 to $14.7 billion as of February 28, 2017. That represents a high, but still manageable, 28% of its market cap.
The company will also spent $800 million over the next four years to upgrade TNT’s computer systems and other operations. Those improvement should add between $1.2 billion and $1.5 billion to FedEx’s annual operating income by the end of fiscal 2020.
Excluding costs to integrate TNT, FedEx expects to earn $11.85 to $12.35 a share for all of fiscal 2017. The stock has gained 20% since the TNT purchase. Even so, it trades at a moderate 16.0 times the midpoint of that range.
The company began paying a dividend in 2002 and has raised it nearly every year since then. The current annual rate of $1.60 a share yields 0.8%.
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