News / FedEx celebrates Q2 profit uptick, but is wary of the Trump effect on US trade

FedEx reported a 2.5% year-on-year increase in second-quarter profits to $1.23bn, despite freight division profitability declining 13% due to increasing IT investment and an average lower weight per shipment.

Group revenue grew 19.2% to $14.9bn, thanks to a boost from TNT Express turnover, increased base rates and better cost efficiencies.

President and chief executive Fred Smith claimed service levels during the quarter had been “outstanding”, noting that its ground handling division had undergone the biggest single-year expansion in its history.

“We opened four major hubs and 19 automated stations,” said Mr Smith. “To have been able to expand to such a degree is one of the most remarkable things I have ever seen in business.”

Alan Graf, executive vice president and chief financial officer, said FedEx was on track to achieve its fiscal 2017 earnings forecast as it continued its long-term network investment plans.

“While these network projects are impacting FedEx Ground’s near-term profitability, the investments will expand capacity, improve service and enhance long-term returns and cash flows,” he said.

The Loadstar’s financial analyst, Alessandro Pasetti, said that while FedEx was delivering in a challenging market, the margin/growth mix did not look good compared with expectations.

“The stock is down 3.8% in the future market and quarterly EPS doesn’t look right based on 2017 estimates above $11 for the year,” he said.

While the overall group performance offered the chance to celebrate, the group’s freight sector reported a year-on-year profit decline, despite revenue increasing 3% to $1.6bn. Operating margins during the three-month period contracted from 6.5% last year to 5.5%.

The result was a $13m dip in profits to $88m from $101m the year before. Mr Smith said costs involved in improving IT systems – both security and legacy – had eaten into profits.

He added: “However, we believe the work underway will transform the LTL landscape. FedEx is about much more than last-mile. We are a globally connected business that can serve almost everyone in the world door-to-door.”

While forecasts indicate 2020 will be a stellar performer for the freight sector, the division’s chief executive, Mike Ducker, said performances would be improving year-on-year to then and beyond.

“2020 will not be a nirvana moment,” he said. “We have recorded contractual increases and improved productivity in this quarter and are working on a path to sustainable double-digit growth.

“In terms of international business, we are pleased and the sector’s priority within the group has grown with particularly strong performances between the US and Asia.”

Mr Smith said that there was concern following the US presidential election results, with a lot of confusion surrounding president-elect Trump’s proposals on trade.

“One in five US jobs are related to trade, and the prospect of reducing US trade is significantly dangerous,” said Mr Smith. “I believe the US should lean into trade and remove barriers to US exports, which the TPP [Transpacific Partnership] was doing.”