FedEx Corporation (FDX), the world’s second-largest package delivery company, reported third quarter 2011 results on March 17. Adjusted earnings of 81 cents per share slipped by a penny but was a nickel above the year-ago earnings. Though slightly below the Zacks Consensus Estimates, the company’s guided figures for the fourth quarter and fiscal 2011 are encouraging.
Third Quarter Review
Lower-than-expected earnings were due to lower shipping volume and increased costs. Additionally, unusually severe winter storms during the quarter disrupted the company’s operations.
Total revenue improved from the year-ago quarter and surpassed the Zacks Consensus Estimate driven by healthy demand and strong yield initiatives. Strong exports from Asia and Europe drove revenues in the FedEx Express segment. Package volume growth at FedEx Ground as well as FedEx SmartPost spurred FedEx Ground revenues. FedEx Freight revenue increased reflecting higher average daily less-than-truckload (LTL) yields partially offset by lower shipments.
Operating expenses increased 12% mainly on high fuel cost. Other expenses such as resumption of certain 401(k) employee compensation programs, higher pension and medical costs, increased aircraft maintenance expenses, reinstatement of merit salary increases as well as cost associated with the combination of FedEx Freight and FedEx National LTL operations, effective January 2011, also added to the higher expense.
(Read our full coverage on this earnings report: Fuel & Storm Knock FedEx)
FedEx projects earnings in the range of $1.66 to $1.83 per share for the fourth quarter of 2011. The company also expects its fiscal 2011 earnings in the range of $4.83 to $5.00 per share. The mid point of $1.75 and $4.92 per share is a penny below the current Zacks Consensus Estimate for both the fourth quarter and fiscal 2011, respectively.
Including FedEx Freight combination costs and the legal reserve, earnings are expected to be $4.49 to $4.66 per share for 2011.
Agreement of Analysts
The overall trend noticed in the last 7 days suggests that the analysts are inclined more toward the positive side in estimate revisions for the upcoming quarter and fiscal year.
Over the last 7 days, 4 analysts out of 19 made upward revisions for the fourth quarter of 2011 and 2 analysts out of 23 did the same for fiscal 2011. None of the analysts moved in the opposite direction for these two periods.
For fiscal 2012, 10 analysts out of 26 revised their estimates on FedEx upward while none made a downward revision.
In the fourth quarter of 2011, earnings growth at FedEx will likely be hampered by several cost headwinds such as higher compensation and benefits, including retirement plans and medical costs, and continued higher aircraft maintenance. However, these costs headwinds are expected to fade out owing to continued growth in volumes and stronger yields.
Going forward, FedEx earnings might be hurt by the ongoing political turmoil in the Middle East and North Africa. Moreover, there is uncertainty regarding the near-term impact of the earthquake and tsunami in Japan on the company’s operational costs, shipping patterns and the global economy.
On the other hand, FedEx is taking full advantage of the global economic recovery by invetsing strategically in key international growth markets, purchasing more efficient aircraft (Boeing 777 freighters) and streamlining its network. In addition, the company is undergoing several initiatives, such as continued yield (revenue per package) improvement as well as strong pricing, which are expected to fuel earnings growth over the next several years. In addition, the integration of the Freight segment will aid it to return to profitability in the upcoming quarter.
Further, FedEx’ 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 affirms the analysts’ confidence on the stock.
Magnitude – Consensus Estimate Trend
Over the last 7 days, the Zacks Consensus Estimate remained static at $1.74 and $4.91 for the fourth quarter as well as fiscal 2011, respectively.
The Zacks Consensus Estimate for fiscal 2012 was raised by 6 cents to $6.47.
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 4.50% 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 third and second quarters.
Neutral on FedEx
We believe improvements in production growth, pricing and volumes as well as strong yield across all revenue segments will facilitate FedEx to generate strong revenue and earnings growth. Further, the restructuring of the Freight segment, which is operating at a loss, will bring its profitabilty back.
Following stiff competition from its close rival United Parcel Service Inc. (UPS), FedEx is boosting its international business through the enhancement of existing routes as well as strategic acquisitions. Going forward, robust global economic growth in Asia, Latin America, China, India, Mexico and Brazilwill continue to remain a source of growth for the company.
Further, FedEx is committed to its shareholders in the form of dividends. However, rising fuel prices risks related to the disaster in Janpan as well as cost headwinds will limit the upside potential of the stock.
Consequently, we are recommending a Neutral rating on FedEx supported by the Zacks #3 (Hold) Rank.