On Wednesday, FedEx (FDX) reported slightly lower-than-expected bottom-line performance in its fiscal second-quarter results. Revenue advanced 3% during the quarter, while reported operating income leapt 15% thanks to roughly 80 basis points of operating-margin improvement. Adjusted for the effects of Hurricane Sandy, however, year-over-year performance wasn’t that great. The firm’s quarterly earnings per share mark of $1.57 compares to an adjusted measure of $1.50, or a 4.7% increase, which itself was augmented by its share-repurchase program. Free cash flow was negative during the six months ended November 30, 2013, consistent with the cash use during the prior-year period. The company experienced improved yield and cost management (and materially better operating margin performance) at FedEx Express (its largest operating segment), but overall, the fiscal second-quarter performance wasn’t as strong as we would have liked. Share repurchases will continue to bolster the company’s bottom-line performance in the quarters ahead:
FedEx is increasing its forecast of full-year earnings per share growth to 8% to 14% above last year’s adjusted results, compared to its previous growth range of 7% to 13%. This outlook reflects share repurchases made to date but does not include any benefit from additional share repurchases. Share repurchases are expected to continue, but the timing will be at the company’s discretion. The outlook also assumes the market outlook for fuel prices and continued moderate economic growth. The capital spending forecast for fiscal 2014 remains $4 billion.
Image Source: FedEx
Traditionally, FedEx hasn’t generated impressive measures of ‘return on assets’ and ‘return on equity’ (see ‘Selected Statistics’ in the bottom of the image above), and performance in the six months ended November 30 was no different. During the period, return on assets came in at just over 5%, while return on equity stood at an even 10%. Our future forecasts for return on invested capital hover in the low-teens, and while this is greater than our estimate of the firm’s weighted average cost of capital, indicating economic profit creation, the magnitude is not great. We think FedEx is a good business, not a great one, on the basis of these return measures. We generally prefer firms that can generate economic returns many times that of FedEx’s such as Apple (AAPL) or Microsoft (MSFT), both of which run very capital-light operations.
Ford (F) was also active with news on Wednesday. Shares have been under pressure since they topped out above $17 per share, and we’re not terribly happy about it. The company continues to expect an outstanding 2013, but 2014 guidance was not all that exciting.
2014 is expected to be another solid year for Ford and a critical building block in the One Ford Plan as Ford moves forward in building stronger global brands, a growing business based on outstanding products and a better balanced business in terms of source of sales and profitability. This is supported by a strengthening balance sheet that will continue to enable the company to reward shareholders with attractive returns.
In 2014, Ford will embark on its most aggressive product launch schedule in its history. The company will launch 23 all-new or significantly refreshed vehicles around the world — more than double the 11 global vehicle launches in 2013.
Overall, 2014 represents the next step in delivering profitable growth for all, with total company pre-tax profit, excluding special items, projected at $7 billion to $8 billion.
Though commentary was encouraging, the automaker’s pre-tax profit guidance for 2014 is below the company pre-tax profit mark of $8.5 billion that it expects to achieve this year. We can’t say we like the numbers, which will be weighed down by new product investment (the 2015 Mustang and new version of the F-150 pickup), but we do note that Ford was only looking for flat profit performance versus 2012 in 2013 and it exceeded expectations. We’re not panicking and continue to believe that pent-up demand for autos will provide a nice tailwind for operations in the coming years. Industry volumes in the US (16-17m versus 15-16m), Europe (13.5-14.5m versus 13-14m) and China (22.5-24.5m versus 19.5-21.5m) are all expected to be better in 2014 than in 2013, and we like the fundamental trajectory. We don’t expect to make any changes to our weighting in Ford in the portfolio of our Best Ideas Newsletter on the news.
Image Source: Ford
Facebook (FB) also made headlines recently, announcing that it will launch video advertisements and start introducing them to users’ newsfeeds on Thursday. The TV advertising market is massive, estimated at more than $65 billion, and it was only a matter of time before Facebook made an entrance. We think this will be a huge profit lever for the company as advertisers jump at the opportunity, but we also expect a backlash from consumers, which will now be exposed to video ads that will start playing automatically as they scroll through their news feed. The Wall Street Journal reported that a survey of 735 Facebook users by global marketing consultancy Analytic Partners indicated that more than 80% of users find the new initiative by Facebook “‘intrusive’ and would likely ‘ignore’ them.” Facebook is charging a pretty penny to reach its 140 million US users aged 18-54 – $2 million per day. All-in, the development is a net positive for Facebook shareholders, in our view.
Related Firms: TWTR, LNKD
Valuentum’s Take
FedEx’s outlook for fiscal 2014 continues to show nice double-digit earnings expansion, even though the improvement will be aided by share buybacks. We think this confirms the positive operating environment for much of the ‘Air Freight & Logistics’ industry. The automotive industry may face some ongoing selling pressure as a result of the news from Ford, but industry volumes are expected to be strong across the globe, and we think this bodes well for profit upside at the automaker. Still, we’ll be paying close attention to its fourth-quarter and first-quarter 2014 performance to get a better feel for the potential for earnings upside. Facebook’s long-awaited foray into video advertisements is now upon us, and even if the move converts a comparatively small number of recurring customers to the video platform, it will be a needle-moving endeavor. We continue to hold a long position in Ford and a call option on Facebook in the portfolio of our Best Ideas Newsletter.
Auto Manufacturers: F, GM, HMC, HOG, TM, TSLA
Air Freight & Logistics: CHRW, CNW, EXPD, FDX, FWRD, HTLD, JBHT, ODFL, HUBG, PACR, UPS, UTIW, WERN