FedEx Corporation (NYSE:FDX) Q2 Preview: Can FedEx Deliver Another Earnings Upside?

FedEx Corporation (NYSE:FDX) is expected to release its second quarter financial results on Dec.18. The delivery services company will host a conference call for the investment community on the same day at 8.30 Eastern Time.

FedEx, with annual revenue of $45 billion, provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services.

Wall Street expects FedEx to earn $1.63 a share, according to analysts polled by Thomson Reuters. The consensus estimate implies an increase of 17.3 percent from $1.39 a share in the same quarter last year. FedEx saw EPS growth of 6 and 7 percent the last two quarters, after reporting three straight periods of falling profits in late 2012 and early 2013.

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FedEx’s earnings have managed to top Street view twice in the past four quarters. The consensus estimate has improved by a penny the last 90 days, and six analysts have upped their earnings estimate for the company in the past month.

Quarterly revenue is expected to increase 2.9 percent to $11.43 billion from $11.11 billion in the corresponding quarter last year. In the past four quarters, the average revenue growth was 3 percent.

FedEx is turning around its core business and reporting growth in overall demand for its global portfolio of solutions. FedEx Express remains focused on reducing costs while facing challenging global economic conditions, and FedEx Ground continues to generate strong profitability on growing customer demand for its services.

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Package volume (both domestic and international) is a key metric in FedEx results. For the first quarter, U.S. domestic average daily package volume increased 1 percent while U.S. domestic revenue per package was essentially flat as a higher rate per pound and weight per package were offset by lower fuel surcharges.

FedEx international’s export average daily volume grew 4 during the first quarter as FedEx International Economy grew 15 percent. International export revenue per package fell 4% primarily due to lower fuel surcharges, lower rates and the demand shift to lower-yielding international services.

Operating income and margin growth would be watched as they were generally constrained by the significant net negative impact of the fuel surcharge timings.

FedEx Ground is the sweet spot of FedEx operating results, with volume growth hovering around 10 percent, and FedEx Freight Segment is showing improvement in the less-than-truckload (LTL) yields.

The company would also benefit from the recently announced rate increases. Effective Jan. 6, 2014, the company would increase shipping rates for FedEx Ground and FedEx Home Delivery by an average of 4.9 percent FedEx Express will increase shipping rates by an average of 3.9 percent for U.S. domestic, U.S. export and U.S. import services. FedEx Freight implemented a 4.5 percent general rate increase on July 1, 2013.

Meanwhile, the outlook for the third quarter should hog the limelight as it includes the results of the busiest holiday period amid surging e-commerce sales.

According to the National Retail Federation (NRF), holiday sales are expected to grow 3.9 percent to $602 billion. This is higher than the average increase of 3.3 percent over the last 10 years. Online holiday sales are expected to increase 15.1 percent year-over-year to $61.8 billion, according to eMarketer.

FedEx saw its busiest day in company history when it moved more than 22 million shipments around the world on Cyber Monday, Dec. 2, 2013. The 11 percent year-over-year increase was driven by online retailers feeding the FedEx Ground and FedEx SmartPost networks. During the busiest week of the year, Dec. 1 – 7, FedEx recorded more than 85 million shipments through its global networks.

The Street will look for any update on the full year outlook. FedEx sees full-year earnings per share growth of 7 to 13 percent from last year’s adjusted results. This outlook assumes the market outlook for fuel prices, U.S. GDP growth of 2.1 percent and world GDP growth of 2.6 percent. The capital spending forecast for fiscal 2014 remains $4 billion. FedEx Express unit is expected to achieve its $1.6 billion operating profit improvement target by the end of fiscal 2016.

For the first quarter ended Aug.31, FedEx reported earnings of $1.53 a share, compared to $1.45 a share last year. Net income grew 7 percent to $489 million, and revenue rose 2 percent to $11.0 billion.

Shares of FDX have gained 46 percent this year and 20 percent since its last quarterly report. They trade 15.6 times forward earnings versus larger rival UPS’ 18.6 times.