FedEx’s Operating Margin: What to Expect in Q4 2018



Fourth-quarter margin estimates

In the fourth quarter, analysts expect FedEx (FDX) to deliver an operating margin of 11.5%. In the same quarter last year, the company reported an operating margin of 11.2%, which shows that analysts expect the fourth-quarter margins to improve by 30 basis points.

FedEx usually witnesses lower operating margins in the first three quarters of the year. The margins usually increase sharply in the fourth quarter. In the fourth quarter, FedEx expects an adjusted operating margin of 11%–11.8%. For fiscal 2019, analysts expect the company to report an operating margin of 9.8%—up 1.2% on a YoY (year-over-year) basis.

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FedEx’s operating margin growth

FedEx remains a key beneficiary of e-commerce growth in the United States and around the globe. In B2C e-commerce, with more stoppages and a potentially higher waiting time, the operating costs will likely increase. Rising crude oil prices are also to blame. According to Statista, the average diesel prices in the United States have risen ~20% in the first quarter—compared to the first quarter of 2017, which will act as a headwind to FedEx’s operating margins. FedEx’s depreciation and amortization expenses are expected to rise 6.3% YoY in the fourth quarter, according to analysts surveyed by Thomson Reuters.

On a positive note, since FedEx has vast control over pricing, the company should be able to grow its operating margin. FedEx Express, FedEx Ground, and FedEx Freight increased shipping rates 4.9% at the beginning of the year. FedEx has also extended the dimensional weight pricing method to its SmartPost packages. FedEx’s Freight segment has levied an over length surcharge on its deliveries. All of these factors should help expand the company’s operating margins going forward.

Peers’ estimated operating margins

FedEx follows the 12-month period of June–May for its financial year. In contrast, FedEx’s logistics (IYT) peers follow the calendar year as the accounting year. As a result, we’ll consider analysts’ fiscal operating margins for FedEx’s peers.

Analysts expect United Parcel Services’ (UPS) operating margins to contract to 10.6% in 2018 from 12.6% the previous year. The highly unionized nature of United Parcel Services’ workforce weakens management’s negotiating ability on the compensation front. Old Dominion Freight Line (ODFL) is expected to report a 0.8% YoY rise in its 2018 operating margin to 18.2% from 17.4%. Analysts expect an improvement of ~1.5% in Saia’s (SAIA) operating margin in 2018 to 8.5% from 7%.

Next, we’ll discuss analysts’ fourth-quarter earnings estimates for FedEx.


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