Why Upside On FedEx's Acquisitions Is More Important Than Q3 Miss

Despite a notable third quarter earnings miss, shares of FedEx Corporation FDX were trading higher Wednesday and analysts at UBS may have the reason why.

Thomas Wadewitz commented in a research report FedEx earned $2.35 per share in the third quarter, which fell "significantly" short of his estimates of $2.55 per share and the consensus estimate of $2.64 per share. But beyond the headline numbers, FedEx expressed encouraging data from its TNT Express acquisitions.

FedEx now expects to see an operating income improvement of $1.2 billion to $1.5 billion in fiscal 2020 off the 2017 base from Express TNT, which is well above the analyst's 2020 forecast of just $630 million and appears to be more optimistic given company's own estimate of generation $750 million in synergies.

FedEx Ground Also Encouraging

Wadewitz also noted FedEx's margins in its Ground unit fell around 165 basis points on a year-over-year, but was still 60 basis points better than expected. Also, ground volume growth slowed to 2.2 percent year-over-year but at the same time revenue per piece rose 6 percent year-over-year.

Wadewitz suggested this "recipe" of slower volume growth and more favorable pricing bodes well for the Ground segment's outlook.

Bottom line, upside from FedEx's recently acquired properties and an encouraging outlook for the Ground segment supports an attractive multi-year earnings per share growth outlook and upside for the stock.

Shares remain Buy rated with an unchanged $215 price target.

See Also:

FedEx Q3: Margin Pressure, TNT Acquisition And The 'Path Of Synergies'

Wells Fargo Sees FedEx More Likely To Deliver Gains Than UPS