Record e-Commerce Volumes Deliver Surprise Quarter for FedEx (NYSE:FDX)

The big question heading into FedEx's (NYSE:FDX) fourth-quarter report was whether a pandemic-driven online shopping spree would outweigh lower business shipping volumes. The answer is a resounding yes.

The delivery and logistics giant announced a 2% decline in revenue to $17.4 billion but adjusted earnings per share of $2.53 that far surpassed the Zacks consensus estimate of $1.42. Although EPS was roughly half what they were in the same period of fiscal 2019, the result showed that record e-commerce volumes offset the loss of higher-margin B2B revenue.

In the wake of the COVID-19 outbreak, FedEx was thrust onto the frontline to deliver critical goods to hospitals and households around the world. Appropriately, safety leapfrogged profitability on the company's near-term priority list. The result was a $125 million increase in operating costs for PPE and medical supplies and a considerably thinner operating margin of 5.2% that lower fuel prices could only support so much.

On the surface, the results may have seemed disappointing, but considering what it was up against, it was a heck of a quarter for the company.

Introduction of Daily Residential Delivery Proves Timely

The core FedEx Ground division capitalized on a generational opportunity by expanding its capabilities and finding ways to become more efficient in an extraordinarily high-volume environment. In hindsight, its timely January 2020 launch of seven-days-a-week FedEx Ground residential service played an important role in keeping it up with online shopping orders. It had the infrastructure in place to support faster daily delivery and keep homebound shoppers and those they ordered from coming back for more.

It also extended drop-off and pick-up service hours at its nearly 55,000 U.S. convenience network locations adding retailers like Walgreens (NASDAQ: WBA) and Dollar General NYSE: DGin the process.

It is taking steps like these that has led to increased market share for FedEx Ground in recent years. Around 10% two decades ago, FedEx Ground market share has gradually grown to more than 30% today. This is an important metric because FedEx Ground is the company's most profitable operating segment.

Meanwhile, FedEx Freight was able to increase revenue per shipment during the fourth quarter. Closed FedEx Office locations, however, led to a drop in printing and shipping-related revenue in the smaller segment.

Domestic e-Commerce Market is a Major Growth Opportunity

What is even more encouraging for investors is where FedEx is headed from here. The company did not provide fiscal 2021 guidance but has previously stated its goal of growing earnings by 10% to 15% per year. And while the current operating environment suggests this may be difficult to achieve in the near-term, the longer-term growth drivers are intact.

The U.S. e-commerce market is the biggest growth catalyst for FedEx. Putting the pandemic-induced shopping blitz aside, Americans are spending more and more time and money online which means the need for FedEx is increasing. The company projects that domestic e-commerce will account for 93% of total market volume growth through 2026.

The company's strategic focus on last-mile optimization, which involves integrating FedEx Express with FedEx Ground, is expected to drive significant operational efficiencies. FedEx Express accounted for over half of fiscal 2020 revenue and will continue to be an important segment as the company expands its massive global footprint.

Although the integration of international courier delivery company TNT Express has been far from express, FedEx should also eventually benefit from this acquisition through lower operational costs and enhanced growth opportunities. In bringing TNT into the fold, it is focusing on higher-value markets and anticipates completing the integration by fiscal 2022.

Sound Financial Management in an Uncertain Environment

Another reason to be bullish about FedEx is its financial discipline. It reduced its fiscal 2021 capital expenditure budget by $1 billion. In targeting capex of $4.9 billion it plans to delay investments in facilities, non-essential maintenance projects, and vehicle replacement. It is also foregoing contributions to its domestic pension plans as another way to reduce capital spending.

Above all, FedEx deserves praise for its heroic role in transporting critical health care supplies and essential consumer goods around the world over the last few months.

And while it has done an admirable job of rising to the present challenge, a panicked, emotionally charged economy is less than ideal for the company's bottom line. The peak consumer online shopping volumes witnessed in the fourth quarter are not sustainable. A return of higher-margin traditional and e-commerce business volumes will be needed to drive healthy profit growth.

Based on the better than expected fourth-quarter performance, low valuation, and growth opportunities around e-commerce, FedEx shares look like a bargain.