FDX FedEx Corp

By Steven Russolillo 

Don't underestimate FedEx Corp.'s air game.

Its ground segment has gotten all the attention lately, with revenue nearly doubling over the past five years thanks to booming e-commerce growth. But what arguably matters more is FedEx's air-shipping Express division, its largest unit, where rising margins are making the unit more profitable overall.

While keeping up with e-commerce growth is always important, Express's continued momentum is the key indicator to watch in fiscal first-quarter results, due Tuesday. Analysts polled by FactSet estimate adjusted earnings for the period ended in August of $2.78 a share, up 15% from a year ago. Revenue is expected to have increased 19% to $14.6 billion.

Express accounts for more than half of FedEx's overall revenue. It will get a boost from the $4.8 billion acquisition of TNT Express NV, the largest deal in its history, completed earlier this year. TNT gives FedEx a stronger footprint in Europe. Analysts at Cowen & Co. forecast TNT will initially dilute earnings. The company expects it to be accretive by fiscal 2018.

Express has shown promise of late. Its international airfreight generates revenue of $54.16 per package, otherwise known as "yield." That is the most among all of FedEx's segments and triple what a domestic package yields. Volumes also have increased.

But what has really stood out is growth in Express's overall operating income, surging about 170% over its past three fiscal years. In its most recent year that ended in May, it exceeded Ground's for the first time in six years.

FedEx shares have outperformed the S&P 500 by 3 percentage points this year. That includes a 12% surge after its March earnings report, its largest one-day percentage gain since 1993, following a strong holiday season. Wall Street has gotten more bullish, too. Some 71% of analysts who cover the company have "buy" ratings on FedEx, the highest in four years.

Granted, FedEx's growth doesn't come cheap. The company expects to increase capital spending 6% year over year to $5.1 billion to keep up with e-commerce. That is almost double what it was 10 years ago, not including TNT integration costs, which is pressuring margins in the Ground segment. Including TNT, this projection jumps to $5.6 billion, according to FedEx's latest forecast.

But it is FedEx's air strategy that should help this stock keep delivering.

tape@wsj.com

(END) Dow Jones Newswires

September 20, 2016 02:47 ET (06:47 GMT)

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