FedEx and rival UPS are often looked at as leading indicators for global trade, as their delivery networks are such integral parts of international commerce. Both companies communicated in 2018 their expectations that growth might slow in 2019 with global trade down in some key areas — as well as the current uncertainty caused by the ongoing U.S. and China dispute. With the first four+ months of the year behind us, it’s a good time to analyze how the two shipping giants are faring.
At the end of 2018, FedEx’s growth was questionable and shareholders were concerned about the carrier’s grim economic outlook for 2019. CEO Fred Smith pointed to weaker international business in Europe and a weaker Chinese economy as reasons why those sectors were down. FedEx, at the time, announced plans to put cost-cutting measures in place, such as employee buyouts and reduced hiring in 2019, to offset the slower growth.
Then, on March 19, 2019, FedEx released disappointing results for the fiscal third quarter, which were lower than anticipated by industry insiders. The carrier’s adjusted EPS of $3.03 was less than analysts’ estimate of $3.11.
Year-to-year, EPS was down 18.5%, as a result of weak revenue growth and increased expenses of the TNT Express integration. Revenue growth of only 2.9% was the lowest it had been in the last 14 quarters. This was due, in part, to a struggling Express segment, which impacted the overall growth. FedEx Ground saw higher costs due to expanding delivery to six days a week, which began in January. However, it is not all bad news: FedEx reported revenue growth across all other operating segments.
FedEx believes that the company will rebound from the disappointing numbers, even with slower international economic conditions and global trade issues. Mr. Smith stated, “Our investments in innovation, network infrastructure, and automation will increase our competitiveness and drive long-term earnings growth. FedEx built and operates the preeminent global parcel and logistics network, and we have a lengthy track record of success.” The carrier seeks to continue to offer innovative solutions to the ecommerce industry, as well as further reduce costs where it can.
After disappointing margins in the last quarter of calendar year 2018, UPS ramped up its capital expenditures to as much as 10% of its revenue in a continuing effort to modernize and expand its networks to meet ecommerce demands. At the end of April 2019, UPS announced its earnings for the 3rd quarter of the fiscal year/first quarter 2019. The results indicated UPS fared better than FedEx in the first three months of the year, with consolidated revenue increasing to $17.2 billion, led by increased average daily volume and higher-quality revenue.
The U.S. Domestic business’s revenue increased by 2.5% compared to last year, in part due to growth in commercial Ground. The investments made by the company in automated hubs has paid off with improved productivity and a lower increase in unit costs. The company expects these improvements will get even better as the year progresses. The international segment saw an operating profit for this quarter, perhaps indicating UPS is more flexible than FedEx when it comes to a volatile global trade environment.
UPS chairman and CEO David Abney was pleased with the results, saying, “The first quarter marked a good start to the year, as we executed against our strategy and generated solid performance across our business. Our Transformation initiatives are enhancing revenue quality and creating network efficiencies that will increase our long-term earnings power. We are on a path to take advantage of growth opportunities and enhance our future performance.”
FedEx and UPS
All eyes in the industry will be on FedEx and UPS for the next quarter as an indicator for the rest of 2019. Both companies will need to wait to see the full impact of their capital expenditures throughout the year while also continuing to adapt to the major impact that the growth of ecommerce has had on the small parcel delivery market.
After that, the next big indicator of how each company is doing will be their approach to the usual end-of-year Peak Season Surcharges and GRIs for 2020. Stay tuned — those announcements will be here before we know it.