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Fedex Beats First-Quarter Expectations

Posted on: Thursday, 22 September 2005, 00:00 CDT

Sep. 22--FedEx Corp. beat Wall Street expectations Wednesday with first-quarter earnings and then did the equivalent of dancing in the end zone when it raised guidance for the rest of the year.

Excluding a 10 cent per share charge, the overnight delivery giant made $1.25 per share this quarter, beating the consensus at Thomson First Call by 7 cents.

"In the near term, there are economic concerns, but overall we see continued improvements in the global economy," said president and chief executive Frederick W. Smith. "Trade is deepening, particularly in high value-added and high-technology products. And global trade continues to grow faster than GDP."

Relieved investors showed their immediate glee, sending its stock on the New York Stock Exchange up nearly 7 percent by noon. It closed at $83.15, up nearly 8 percent -- less than a week after hitting a 52-week low as uncertainty related to Katrina and fuel prices caused some pre-earnings jitters.

"We got reminded of two things today," said Donald Broughton, A.G. Edwards analyst in St. Louis. "First, this is a world-class, industry-leading transportation company that is going to perform well in most economies.

"Second, despite all of our concern about the economy, it is still very healthy -- especially global commerce -- and FedEx is the gatekeeper of global trade."

FedEx now expects to earn $5.25-$5.40 for year ending May 30 -- a nickel more than it projected in June. The guidance includes the effect of the onetime $79 million charge it took in the quarter to reflect increases in airport rental facilities.

Excluding the charge, FedEx plans to earn $5.25-$5.50 for the year. Wall Street expects the earnings will be $5.28.

"A lot of people were expecting the guidance to go down or at least not to go up," said Morgan Keegan analyst Art Hatfield. "Anyone short in the stock is covering their position. Clearly, no one is selling."

Companywide, revenue was up 10 percent to $7.7 billion from the August quarter a year ago with strong assists from FedEx Express -- which posted an 11 percent gain, or $500 million -- and FedEx Ground, which contributed a total of $1.22 billion, a 14 percent increase.

FedEx Freight, which analysts say accounted for 11 percent of the company's revenue, pulled in a strong finish with 31 percent increase in operating income on an 11 percent increase in revenue.

While revenue at FedEx Kinko's was up 6 percent from last year's quarter of $490 million, operating income fell 16 percent and margins were down slightly.

Kinko's CEO Gary Kusin said that while margins at the division are typically down in the first and third quarters, the numbers are down now because it is "teeing up new products" to increase the volume of Express and Ground packages it receives.

"We're transitioning what we do to create a better bundle for FedEx customers," he said.

But as fuel costs, surcharges and hurricane worries increase, FedEx finds itself in "unknown territory," said FedEx chief financial officer Alan Graf.

"Our guidance does not include $100 barrel oil for sure. If the price gets too far north of here, it will be of significant concern."

Although Katrina affected only three days of business in the quarter and had "no significant impact" on earnings, it damaged FedEx facilities on the Gulf and continues to disrupt service in most New Orleans Zip Codes, he said.

Ted Scherck, president of Atlanta-based Collography Group, suggests the economy is in too much turmoil for a "rational comment" on the short-term outlook for it or FedEx.

"We don't know how damaged the fuel production capacity is in the Gulf," he said. "And with the interest rate bump from the Fed, things are so muddled right now.

"In the long-term, FedEx is fairly well-positioned. ... But God forbid, if Rita hits Houston or Galveston, that's going to be another major interruption."

With Express surcharges increasing to 15 percent in October, the worry is that customers will divert their shipments to Ground or drive to the store to buy the goods themselves.

FedEx admits it's seen some customers shift from Express to Ground, where the surcharge is 3 percent, and though it says the results are immaterial, analysts aren't so sure.

"If FedEx notices, it's not that immaterial," Hatfield said.

But Broughton says most FedEx customers choose the product "not because they are cost-conscious but because they want the reliability of its speed.

"So far, FedEx has continued to gain market share," he said. "With the controversy over rising fuel and the distraction of hurricanes, it's easy to lose perspective and forget this is a global company with the industry-leading franchise."

The company's daily package volume increased 5 percent in the quarter with rare and impressive gains in the domestic overnight business, which was up 4 percent after nearly flat growth quarter after quarter.

Volume in the company's more lucrative international priority business grew 6 percent, turning in a 13 spike in revenue.

But Smith cautioned analysts from putting too much stock in the artificial barriers between domestic and international express markets.

"There is no domestic and international Express anymore," he said. "It is a global market."

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FDX, TOC, AGE, RF,

Source: The Commercial Appeal

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