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FedEx Corporation (FDX - Analyst Report) – the leader in global express delivery services – reported its fourth-quarter fiscal 2014 results.

Quarterly adjusted earnings of $2.46 per share steered ahead of the Zacks Consensus Estimate of $2.36 and significantly exceeded the year-ago adjusted earnings of $2.13 per share. Growth came primarily on the back of rising volumes and increased operational efficiencies at the Freight segment, along with volume and yield expansion at Ground and improved margins at Express.

Total revenue during the fourth quarter grossed $11.8 billion, higher than $11.4 billion reported in the fourth quarter of fiscal 2013. The top line also beat the Zacks Consensus Estimate of $11.6 billion.

For fiscal 2014, the company reported earnings per share of $6.75 (up 8.3% year over year) on revenues of $45.6 billion (up 2.9% year over year).      

Operating income improved 7.3% year over year to $1.18 billion in the fourth quarter, resulting in an operating margin of 10.0%, up 40 basis points (bps) from 9.6% in the year-ago quarter.

Operating income for fiscal 2014 climbed 7.5% year over year to $3.45 billion, representing an operating margin of 7.6%, up 30 bps from 7.3% in the year-ago quarter.

Segment Performance                   

Quarterly revenues of FedEx Express were $7.0 billion, up from $6.98 billion in the year-ago quarter. The upside was attributable to higher package volume and higher base package yields, diminishing the impacts of one less operating day, and lower fuel surcharges and express freight revenues. 

Operating income was up 3% year over year to $475.0 million in the fourth quarter, resulting in an operating margin of 6.8%, up 20 bps from 6.6% in the year-ago quarter. Operating results were positively impacted by higher base package yields and volume and lower pension expenses, offsetting the negative impacts of lower fuel and freight revenues and one less operating day.

The FedEx International Priority average daily package volume remained flat year over year while revenue per package (yield) increased 1%.

FedEx Ground revenues increased 8% year over year to $3.01 billion in the fourth quarter. Operating income was up 5% year over year to $586 million due to rise in volume and revenue per package. However, operating margin decreased 60 bps to 19.5% owing to cost escalation.

FedEx Ground average daily package volume grew 8% year over year driven by e-commerce services. Revenue per package increased 2% given rate hikes and higher residential surcharges offsetting lower fuel surcharges. FedEx SmartPost average daily volume decreased 8% year over year. Revenue per package increased 8% due to higher rates.

FedEx Freight revenues were up 12% year over year to $1.55 billion in the fourth quarter, reflecting a rise of 12% in LTL (less-than-truckload) average daily shipment. Yield was up 1% year over year. The segment recorded operating income of $122 million, a rise of 51% from $81 million in the year-ago quarter, backed by higher volumes, average weight per shipment, and increased operational efficiencies. Operating margin was 7.9%, up 210 bps from the year-ago quarter.

FedEx Services revenues fell 1% year over year to $402.0 million in the fourth quarter

Liquidity

FedEx exited fiscal 2014 with cash and cash equivalents of $2.9 billion compared with $4.9 billion at the end of fiscal 2013. Long-term debt was $4.7 billion, up from $2.7 billion in the fiscal 2013. Capital expenditure amounted to $3.5 billion at the end of fiscal 2014.

Share Repurchase

During the fourth quarter, the company bought back 9.9 million shares, resulting in total repurchase of 36.8 million shares in fiscal 2014. As of May 31, 2014, the company had repurchase authorisation of 5.3 million shares.

Guidance

For fiscal 2015, FedEx estimates earnings in the range of $8.50 to $9.00 per share. Capital spending is expected to be $4.2 billion.

Our Analysis

Despite a subdued third quarter, FedEx bounced back with impressive fourth quarter results on the back of significant operational efficiency along its network and improving profits across all segments. We expect FedEx to continue witnessing earnings momentum and enjoy growth from its long-term expansion opportunities. The company is concentrating on network realignment to match the current demand level, improving its performance and gaining competitive advantage over the likes of United Parcel Service, Inc. (UPS - Analyst Report) and Radiant Logistics, Inc. (RLGT - Snapshot Report).

Nevertheless, the effects of a sluggish economic environment have clouded the near-term outlook of the company. Further, competitive threats, legal hassles, unionized workforce and pension headwinds could limit the upside potential of the stock.

Zacks Rank and Other Stocks

Currently, FedEx carries a Zacks Rank #3 (Hold). A better-ranked stock in this sector is Air Transport Services Group, Inc. (ATSG - Snapshot Report), which holds a Zacks Rank #2 (Buy).

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