FedEx’s fiscal 2017 expectations
In the previous part of this series, we discussed Wall Street analysts’ target prices and recommendations for FedEx (FDX) and its peers. In this article, we’ll look at the management’s expectations. FDX plans to continue the profit improvement initiatives undertaken by the company in 2015 in fiscal 2017. The company aims to combine TNT Express’s European strengths with its worldwide capabilities.
The impact of TNT Express on earnings
As discussed in the first part of this series, the company is projecting adjusted EPS (earnings per share) of $11.75 to $12.25 in fiscal 2017. However, FDX stated that the forecast EPS would be excluding TNT Express’s results of operations, financing and integration costs, and year-end mark-to-market pension accounting adjustments. FedEx expects the TNT acquisition to impact earnings favorably in fiscal 2018. It plans to bank on TNT’s lower-cost road network.
After the company’s changes in pension accounting, FedEx incurred a non-cash, pre-tax mark-to-market pension accounting loss of $1.5 billion in fiscal 2016. For fiscal 2017, the company expects a contribution of $1.1 billion to its US pension plans. Also, FedEx repurchased shares of $2.7 billion in fiscal 2016. It had nearly 19.0 million remaining shares to be purchased under the stock buyback program.
The company aims to attain a double-digit margin for its FedEx Freight segment. FedEx anticipates growing margins, EPS, and capital returns in the long run. It expects to fund its 2017 capital expenditure through cash from operations.
Probable factors affecting earnings growth
FedEx believes the earnings growth in fiscal 2017 will be largely dependent on fuel prices and worldwide economic circumstances. The company expects US GDP to grow by 1.6% in calendar 2016 and 2.4% in calendar 2017, mainly due to anticipated gains from increased consumer spending.
However, FDX forecasts that US industrial production will fall by 0.6% in calendar 2016 and rise by 2.3% in calendar 2017. Global GDP, according to FedEx, is expected to grow by 2.3% in calendar 2016, which is 20 basis points lower quarter-over-quarter. In regards to its relationship with Amazon (AMZN), FedEx has reiterated that no single customer accounts for more than 3% of total revenues of FDX.
Investors interested in the transportation and logistics sectors could consider the iShares US Industrials ETF (IYJ). Major railroads such as CSX (CSX) and Union Pacific (UNP) and prominent airlines (DAL) make up ~5.2% and ~4.8% of IYJ’s portfolio holdings, respectively. In the next part of this series, we’ll analyze FedEx’s returns to its shareowners.