FedEx Corporation (FDX), the world’s second-largest package delivery company, reported first quarter fiscal 2011 results on September 16, 2010. FedEx earnings missed the Zacks Consensus Estimate by a penny. The company’s second quarter and fiscal year 2011 outlook were also disappointing.
Yesterday, FedEx announced plans to raise its Express shipping rates by an average of 3.9% for both U.S. domestic and export services, effective January 3, 2011. In addition, effective November 1, 2010, FedEx Freight and FedEx National rates will also be raised by 6.9% for less-than-truckload (LTL) shipments.
First Quarter Review
The company’s adjusted earnings of $1.20 per share were above the year-ago earnings of 58 cents. Growth in International Express shipment as well as higher volumes in FedEx Ground segment, which was partially offset by resumption of certain 401(k) employee compensation programs, higher pension, higher aircraft maintenance expenses as well as operating loss at FedEx Freight, led to stronger earnings in the reported quarter.
Total revenue increased 18% year over year to $9.46 billion and was in line with the Zacks Consensus Estimate. Strong exports from Latin America, Asia and the U.S. 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 increased 28% year over year, reflecting higher average daily LTL shipments partially offset by lower yields. FedEx Freight is still operating at a loss.
(Read our full coverage on this earnings report: FedEx Misses but Doubles Profit)
FedEx projects earnings in the range of $1.15 to $1.35 per share for the second quarter of fiscal 2011. The mid-point of $1.25 is well below the current Zacks Consensus Estimate of $1.33. FedEx raised its fiscal 2011 earnings estimate to $4.80 to $5.25 per share from its previous outlook of $4.60 to $5.20. The mid-point of $5.02 is also below the current Zacks Consensus Estimate of $5.21.
Agreement of Analysts
The overall trend noticed in the last 30 days suggests the analysts’ concern on the stock as they appear more inclined toward the negative side in estimate revisions for the upcoming quarter. Out of 18 analysts covering the stock, 10 made downward revisions while 4 revised their estimates upward.
These analysts are concerned that reinstatement of employees’ compensation program and increased pension expense might dampen near-term earnings growth. FedEx continues to invest largely in new international service offerings, including the new Boeing 777 freighter, thereby raising the expenditure on aircraft. Going forward, this investment will provide FedEx an edge over its competitors. Moreover, volatile fuel prices may also keep earnings under pressure.
For fiscal 2011, 8 out of 21 analysts covering the stock have made upward revisions. Only 4 analysts made downward revisions for the same period. The analysts are positive on the outlook for fiscal 2012 as 5 analysts made upward revisions while 3 moved in the opposite direction.
Over the last 7 days, only one analyst revised its estimate upward for fiscal 2011 and 2012. There have been no revisions for the upcoming quarter.
We believe resumption of industrial production growth, improved volume growth, and strong yield across all the revenue segments will facilitate FedEx to generate strong earnings growth in fiscal 2011. However, earnings growth for fiscal 2011 will be restricted due to higher pension costs, increased aircraft maintenance expense, higher health care costs and resumption of certain 401(k) employee compensation programs.
FedEx Freight is currently operating at a loss and is a headwind for the company. Thus, the company plans to combine FedEx Freight and FedEx National LTL operations from January 30, 2011, which is expected to reduce operational costs and improve efficiencies and yields. This combination will turn FedEx Freight segment profitable in fiscal 2012 and help the ongoing yield management initiatives.
Additionally, FedEx expects to invest about $3.5 billion in fiscal 2011, which will generate significant long-term savings, support international business growth and drive higher earnings, margins and returns.
Magnitude – Consensus Estimate Trend
First quarter results suggest no changes in the Zacks Consensus Estimate over the last 7 days for the upcoming quarter and fiscal 2011. However, for fiscal 2012, the Zacks Consensus Estimates inched up by a penny to $6.24 per share.
Over the last 30 days, the Zacks Consensus Estimate reduced 3 cents and rose 4 cents for the first quarter 2011 and fiscal 2012, respectively. The Zacks Consensus Estimate for fiscal 2011 remains unchanged at $5.21.
With respect to earnings surprises, the company’s fairly good track record is expected to persist in the coming quarters. FedEx produced an impressive average earnings surprise of 2.51% over the last four quarters, which suggest that it beat the Zacks Consensus Estimate by that amount over the last year. Nevertheless, the company fell short of the Zacks Consensus Estimate in the current quarter by a nominal 0.83%.
Though the company has suffered from the economic recession over the last couple of years, improving global economy along with rising trade in international shipping is expected to fuel growth. FedEx 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. Management expects its earnings and revenues to improve throughout fiscal 2011.
Further, a solid balance sheet and adequate financial flexibility along with continued cost management will likely create favorable operating leverage. Although operational weakness and restructuring of the Freight segment will pressure overall margins and earnings over the next several quarters, it will lead to profitability in the medium term. Thus, with improving trends and fundamentals, we do not see a significant downside, but view upside as somewhat limited due to numerous cost headwinds. We are currently recommending a Neutral rating on the shares with the Zacks #3 (Hold) Rank.