LTL steals the quarterly spotlight from FedEx
Amid all the talk of planes and packages, it’s easy to forget that FedEx Corp.’s LTL business has become the company’s golden child, once the company’s problem child.
A business unit that accounts for approximately 10% of FedEx revenue (NYSE: FDX) fourth-quarter fiscal 2022 revenue will never be the tail wagging dog of $92 billion in annual revenue. Still, there’s no denying that FedEx Freight was the star of the company’s last quarterly show. Operating profit more than doubled year-on-year to $602 million, beating analysts’ most optimistic estimates. Operating margin increased year-over-year by 570 basis points to 21.8%. Revenue jumped 23.3% to $2.7 billion. Daily tonnage decreased by 5% year-on-year, in line with the general trend of lighter shipments.
Yields jumped 30% year-over-year and 10% sequentially, reflecting the twin tailwinds of firm prices and fuel surcharges. FedEx Freight ended the quarter with an operating ratio of 78% – the ratio of revenue to expense – an impressive figure for any LTL carrier.
The unit’s stellar performance, which has been on display for several quarters but may have peaked in the quarter just ended, is a far cry from what FedEx Freight was a decade ago. During the Great Recession of 2008-09, the unit was battered by low volumes and poor pricing, the latter the result of an unfortunate decision to lead YRC Worldwide Inc., then faced with a bankruptcy filing, to bankruptcy by undermining YRC on rates. The move backfired and wreaked havoc on the earnings picture of LTL carriers in general.
However, price’s sanity was eventually restored. Since then, the LTL pricing environment has remained firm and no carrier has been mad enough to offset the basket of apples.
FedEx Freight clearly benefited from a bullish environment for fuel surcharges, which company executives said was the main driver of FedEx’s “revenue quality” in the quarter. Other publicly traded LTL carriers will report quarterly results over the next 45 days, and analysts expect similar fuel surcharge tailwinds to be reflected in their numbers. Old Dominion Freight Line Inc. (NASDAQ: ODFL), widely regarded as the best-run LTL carrier, could see an operating ratio in the 60% range due to the impact of fuel surcharge increases, according to a sector source. Old Dominion reported an operating ratio of 72.9% in the first quarter.
FedEx Freight offered a preview of upcoming attractions due to timing: The parent company operates on a fiscal year that ends May 31. The quarter just ended with a near unprecedented spike in oil and diesel fuel prices following Russia’s February 24 invasion of Ukraine. .
As FedEx Freight’s fortunes continued to grow, FedEx Ground, which is seen as the key to the parent company’s sustained profitability, continued to tread water. Revenue grew only 4.4%, below high-single digit estimates. Operating profit fell 4.2% to $1.05 billion, while adjusted operating margins fell to 12.5% from 13.6% in the prior year. The unit continued to be plagued by higher costs for labor and third-party transportation, two legacies of several quarters of network disruptions blamed primarily on labor shortages. It also reported a $200 million increase in self-insurance costs due in part to higher claims costs. An 11% increase in shipping efficiency was not enough to offset the impact of cost increases, company executives said.
FedEx guided earnings per share of $22.50 to $24.50 per share for fiscal 2023, above the initial consensus of $22 per share and a year-over-year increase of 9% to 19 %. Margins are expected to rise in all three transportation segments, including FedEx Ground, where lingering cost pressures should finally be eliminated, executives said, and prices overall should remain firm and outpace inflation.
Most of the headline numbers for the fourth quarter are in line with analysts’ expectations. Adjusted earnings per share increased 37% to $6.87 per share, revenue increased 8% to $24.3 billion and operating margin increased 50 basis points to 9.2% . Thursday’s post-earnings analyst call was mostly a non-event with FedEx and analysts gearing up for a long-awaited two-day investor meeting that begins Tuesday at the company’s headquarters in Memphis, Tennessee. The leaders are expected at the meeting to present a detailed medium and long-term profitability plan. The meeting comes less than a month after Raj Subramaniam, the company’s chairman, was named CEO, replacing FedEx founder and chairman Frederick W. Smith.
Investors feel cost and network pressures are starting to ease, said Todd Fowler, transportation analyst at KeyBanc Capital Markets. Headwinds from cost-cutting, combined with the company’s earnings quality initiatives, should be viewed favorably by investors, said Fowler, who has an overweight rating and a price target of $300 per share on 12 months. Shares rose 7% in midday trading Friday to $243 per share.
The company doesn’t expect much support from consumer spending, at least in the US
Customer demand moderated in the fourth quarter — and spread into the current quarter — as consumers felt inflationary pressures and e-commerce activity slowed as Americans returned to in-store shopping. Industrial demand, which primarily affects the fortunes of LTL carriers, held up well as consumer activity weakened. However, a manufacturing activity index released by S&P Global on Thursday fell to 52.4 in June from 57 in May, well below market expectations of 56 and the slowest growth in manufacturing activity in nearly two years. The index was dragged lower by contractions in production and a drop in new orders, S&P Global said.
FedEx executives expect low-digit volume growth in its air express and ground parcel business for the remainder of its 2023 fiscal year.