FedEx (FDX) grew second-quarter fiscal 2018 revenue 9.3% and net income by 10.7%, and raised guidance for full-year earnings. We consider volume and yield improvements impressive, and expect to increase our fair value estimate due to time value of money since our prior update and broad growth exceeding our expectations, constrained by margins lower than we projected for this year. We maintain our narrow moat rating.
Despite the cyberattack on TNT, Express grew revenue 8% and improved its adjusted operating margin 20 basis points to 8.7%. Ground improved revenue 11.5% and expanded op margin 10 basis points to 10.6%. Reflecting improved capacity and shipment balance in the U.S. truck market, Freight increased revenue per shipment by 7% and average daily shipments by 4%, generating 10% revenue growth, but in our view the 6.7% operating margin (5.5% in the year-ago period) remains stubbornly distant from the firm’s 10% operating margin target.
FedEx maintains its $5.9 billion capital expenditure budget for fiscal 2018, but may increase this budget if new U.S. tax law enables immediate capital expenditure expensing. The firm estimates total TNT Express integration will cost $1.4 billion, with $450 million incurred in fiscal 2018. We consider this a significant increase from the prior total estimate of $800 million. Unsurprisingly, much of the increase is due to hardening TNT security and accelerating the transition from TNT systems to FedEx’s sophisticated IT systems. This is probably unavoidable, given this cyberattack suspended TNT’s parcel operations.
Express grew volume and yield 1% and 5% year over year in the U.S., plus 4% and 3% in international services. Ground grew volume 5% and yield 7%. FedEx expects all segments to improve volume and yield during second-half fiscal 2018, and increased its full-year EPS guidance to $12.70-$13.30 (from $12.00-$12.80) before expenses related to mark-to-market pension adjustments, TNT integration, and certain legal matters.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.