FedEx: Earnings Scorecard - Analyst Blog

FedEx Corporation (FDX), the world's second-largest package delivery company, reported second quarter 2011 results on December 16, 2010. FedEx earnings missed the Zacks Consensus Estimate of $1.31. Though the company's third quarter and fiscal year 2011 outlook is encouraging, they are below the Zacks Consensus Estimates.

Second Quarter Review

The company's adjusted earnings of $1.16 per share were below $1.10 in the year-ago quarter. Higher pension, higher aircraft maintenance expenses and the reinstatement of certain 401(k) employee compensation programs put a drag on the company's operating performance during the reported quarter.

Total revenue increased 12% year over year to $9.63 billion attributable to solid travel demand and healthy economy but was below the Zacks Consensus Estimate of $9.75 billion. The strong exports from Asia drove revenues in the FedEx Express segment.

Package volume growth at FedEx Ground as well as FedEx SmartPost volume growth spurred FedEx Ground revenues. FedEx Freight revenue climbed 14% year over year, reflecting higher average daily less-than-truckload (LTL) shipments partially offset by lower yields.

(Read our full coverage in this earnings report: FedEx Disappoints, Hurt by Charges)

Company Guidance

FedEx projects earnings in the range of 95 cents to $1.15 per share for the third quarter of 2011. The mid-point of $1.05 per share is well below the current Zacks Consensus Estimate of $1.09.

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 on expected strong demand and yield improvements in the second half of 2011. Nevertheless, the mid-point of $5.025 is also below the current Zacks Consensus Estimate of $5.15.

Agreement of Analysts

The overall trend noticed in the last 7 days suggests that the analysts have regained their confidence, as they are more inclined toward the positive side in estimate revisions for the upcoming quarter and fiscal year.

Over the last 7 days, out of 20 analysts covering the stock, 3 made upward revisions while 2 made downward revisions for the third quarter of 2011. For fiscal 2011, 3 analysts out of 23 revised their earnings estimates in both directions. For fiscal 2012, 7 analysts out of 23 revised their estimates on FedEx upward while none of them moved downward.

In the second half of fiscal 2011, earnings growth at FedEx will likely be hampered by several cost headwinds such as increase in pension expense, higher volume-related aircraft maintenance expenses and resumption of certain 401(k) employee compensation programs. However, these costs headwinds are expected to fade off owing to the gradually improving global economic environment as well as stronger-than-expected consumer demand.

The company is taking full advantage of the global economic recovery by investing strategically in key international growth markets, acquiring more efficient aircraft and streamlining its network. FedEx invests largely in aircraft and plans to increase its investment in fuel efficient Boeing 777 freighters, thereby raising its expenditure on aircraft.

However, this investment will provide FedEx an edge over its competitors and will generate significant long-term savings, support international business growth as well as drive higher earnings, margins and returns.

Further, FedEx's long-term goals of 10.0% revenue growth per year, more than 10.0% operating margin, earnings per share in the range of 10.0–15.0% per year, improving cash flows, and increasing returns on invested capital affirmed it confidence.                                                          

Magnitude – Consensus Estimate Trend

Over the last 7 days, the Zacks Consensus Estimate was raised by a penny for the upcoming quarter and a dime for fourth quarter 2011. This shows management's increased confidence in earnings growth during the second half.

However, fiscal 2011 Zacks Consensus Estimate was reduced by one cent to $5.18. The Zacks Consensus Estimate for fiscal 2012 was raised by 3 cents to $6.29.

Earning Surprises

With respect to earnings surprises, the company's fairly good track record is expected to continue in the coming quarters. FedEx produced a negative average earnings surprise of 2.24% over the last four quarters, which suggests that it missed the Zacks Consensus Estimate by that amount over the last year. The company missed the Zacks Consensus Estimate in both the reported and the first quarters.

Neutral on FedEx

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 upside. The combination of FedEx Freight and FedEx National LTL operations from January 30, 2011 will reduce operating costs and bring back FedEx Freight to profitability in fiscal 2012.

Following stiff competition from its close rival United Parcel Service Inc. (UPS">UPS), FedEx is boosting its international business through the enhancement of existing routes as well as strategic acquisitions.

The company will acquire MultiPack, a Mexican domestic express package delivery company in the second quarter of calendar year 2011. FedEx Express also plans to acquire AFL Pvt. Ltd, a logistics, distribution and express business in India in the third quarter of fiscal 2011. These acquisitions will expand its network and enhance its capabilities in Mexico and India.

Further, FedEx is committed to its shareholders in the form of dividends. However, reinstatement of employees' compensation program, increased pension expense, aircraft maintenance expense, volatile fuel prices and competitive threats will dampen near-term earnings growth.

Consequently, we are recommending a Neutral rating on FedEx supported by the Zacks Rank of #3 (Hold).

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

 
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