Why FedEx Will Likely Report Lower Operating Margins for Fiscal 1Q18



FedEx’s estimated operating margin in fiscal 1Q18

FedEx (FDX) has a pattern for its operating margins. Normally, its operating margins are down in the first three quarters of the year and substantially up in the fourth quarter. Thomson Reuter’s surveyed analysts estimate that FedEx will report an operating margin of 9.4% for fiscal 1Q18, compared with 9.3% in fiscal 1Q17.

For the next four quarters, analysts predict that FedEx’s operating margins will be 9.6%. Compared with its past four quarters, this is marginally higher, but notably, analysts have revised their estimated operating margin for FedEx downward for fiscal 2018.

Article continues below advertisement

Peer group’s estimated operating margins

On a yearly basis, analysts also made a downward revision to United Parcel Service’s (UPS) estimated operating margin, projecting that it will fall 13% in fiscal 2017 and rise slightly by 0.2% next year.

Old Dominion Freight Line (ODFL) is expected to report a 17% operating margin for fiscal 2017, indicating an expansion of 0.8% on a YoY (year-over-year) basis.

Analysts have projected an improvement of 50 basis points for SAIA (SAIA) for fiscal 2017. The company is expected to report a 7% operating margin, while YRC Worldwide (YRCW) is expected to report a 2.9% operating margin, reflecting a 0.3% YoY rise.

Analysts are expecting the LTL (less-than-truckload) players to exercise higher pricing in the coming quarters. This should boost the revenue-per-hundredweight, a key metric followed in the LTL industry (IYJ). However, the recent mayhem caused by Hurricanes Irma and Harvey could spoil LTL players’ operating margins in the coming quarter.

According to FedEx spokesman Jim Masilak, “FedEx is monitoring Hurricane Irma, and our thoughts are with everyone in the path of this powerful storm. Safety is our priority as we implement contingency plans to protect team members and facilities.”

Article continues below advertisement

Lower operating margins for FedEx?

FedEx is aiming for a 10% operating margin over the long term. The company has seen a rebound in the FedEx Freight business’s operating margin in recent quarters. While the company has seen a higher top line in its ground business, investors shouldn’t forget that margins are normally lower on the e-commerce revenue front. The fast growth of the business-to-customer revenue line has been hit hard from hurricane-related disruptions.

On June 28, 2017, FedEx reported that the global operations of TNT Express were hugely affected by a cyberattack. The Memphis-headquartered company also mentioned that other FedEx companies’ data remained unaffected by the attack, but the attack will likely weigh on the company’s operating margin in fiscal 1Q18.


More From Market Realist