FedEx Disappoints, Hurt by Charges - Analyst Blog

FedEx Corporation (FDX) reported second quarter of fiscal 2011 financial results that fell below the Zacks Consensus Estimates. Quarterly adjusted EPS of $1.16 was below the Zacks Consensus Estimates of $1.31. Management cited higher fuel costs and the reinstatement of employee compensation and benefit expenditures as the primary reasons for the poor performance.

Second quarter total revenue was $9,632 million. This was an improvement of 12% year over year, but well below the Zacks Consensus Estimate of $9,749 million. We believe this was mainly due to slower-than-expected growth in international express deliveries. International air-shipment in some of the European countries reduced as a result of ongoing economic turmoil.

GAAP net income in the reported quarter was $283 million or 89 cents per share compared to a net income of $345 million or $1.10 per share in the year-ago quarter.

Operating income was $469 million, down 18% year over year from $571 million, resulting in operating margin of 4.9% compared with 6.6% in the year-ago quarter. Operating expenses was $9.16 billion, up 14% from the year-ago quarter.

Segment Results

FedEx Express revenue was $5.99 billion, up 13% year over year. The increase was primarily driven by exports from Asia, increased weight per package and higher fuel surcharges. Operating income was $264 million in the reported quarter, down 23% from the year-ago quarter. FedEx International Priority (IP) average daily package volume expanded 11% year over year while revenue per package increased 3%.

FedEx Ground revenue increased 13% year over year to $2.08 billion. The increase can be credited to package volume growth at FedEx Ground as well as FedEx SmartPost. Operating income increased 24% year over year to $296 million. FedEx Ground average daily package volume increased 7%, while yield grew 5% during the quarter. FedEx SmartPost volume increased 17%, while yield grew 10%.

FedEx Freight revenue increased 14% year over year to $1.22 billion, reflecting higher average daily LTL (less-than-truckload) shipments, which were partially offset by lower yields. The segment posted an operating loss of $91 million compared with operating loss of $12 million in the year-ago quarter. An 8% increase was recorded in LTL average daily shipments, while yield increased by 7% year over year.

FedEx Services revenue fell 7% year over year, due to lower copy revenues.

Financial Outlook

FedEx has projected earnings in the range of $0.95 to $1.15 per share for the third quarter of 2011. FedEx raised its fiscal 2011 earnings estimate to $5.00 to $5.30 per share from its previous outlook of $4.80 to $5.25.

Our Take

We believe FedEx will benefit from moderate economic growth followed by volume growth and strong yield across all the revenue segments will facilitate FedEx to generate strong revenue and earnings growth. Management announced that the company delivered 16 million packages on December 13, 2010 – the busiest day of the year for FedEx.

The company's primary competitor is United Parcel Service Inc. (UPS). FedEx also plans to acquire a Mexican domestic express package delivery company called MultiPack, which will allow strong foothold in the Mexican domestic market. However, reinstatement of employees' compensation program, increased pension expense along with volatile fuel prices will dampen near-term earnings growth.

FedEx currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.


 
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