FedEx’s operating margins
In an investors’ presentation on March 16, 2016, FedEx (FDX) reiterated its long-term financial goals. FDX’s primary goal on the financial front is improving its overall operating margin to more than 10%. The operating margin is operating profit after deducting direct expenses absorbed in revenue generation. Higher operating margins trickle down and usually improve earnings. The company is targeting $1.6 billion in annual profit improvement by the end of 2016. Its financial year closes on May 31.
The above graph shows that FDX has a history of varying operating margins. The post-financial crisis year drop in operating margin represents the impairment charges related to the write-off of goodwill in a certain business. The margins have become more incomparable during the last three years, as they include gains or losses in pension accounting at operating levels. On an adjusted basis (mark-to-market pension adjustments, impairment, and other charges), the operating margins are 7.8%, 7.9%, and 9.0% for fiscal 2013, 2014, and 2015, respectively.
Profit improvement measures
The company has undertaken certain profit improvement initiatives in its FedEx Express segment like:
- organizational rationalization and sourcing improvements
- elimination of non-essential work and retirement of redundant systems and processes
- absolute and permanent reduction in overall cost structure
- investments in fleet modernization that have reduced the trip cost for Boeing 757s by up to 20% and Boeing 767s by up to 30%
- implementation of new technology and processes to improve flight and crew scheduling
- adoption of pickup and delivery operations to maximize on-road efficiency
- consolidation of facilities and stations and the refinement of aircraft maintenance processes
The operating margins for some of FedEx’s peers are as follows:
- United Parcel Service (UPS) reported an operating margin of 13.1%.
- YRC Worldwide (YRCW) reported an operating margin of 2.0%.
- Air Transport Service Group (ATSG) recorded an operating margin of 11.8%.
- B. Hunt Transport (JBHT) recorded an operating margin of 11.5%.
- Old Dominion Freight Line (ODFL) reported an operating margin of 16.8%.
Major US airlines and railroads make up 7.2% and 3.7% of the iShares Global Industrials ETF (EXI), respectively. This ETF holds 1.2% in FedEx.
The transportation and logistics industry is very capital-intensive. In such a situation, it becomes imperative for investors to check the leverage levels of the players. In the coming part, we’ll discuss the debt levels of FDX.