FedEx Posts 34 Percent Hike in Third-Quarter Earnings

By Jane Roberts, The Commercial Appeal, Memphis, Tenn.

Mar. 23–FedEx Corp. earnings increased 34 percent in the third quarter, fueled by a record holiday season and a network analysts say is years ahead of the competition.

Wednesday, the overnight giant reported earnings of $428 million, or $1.38 per share, for the third quarter ended Feb. 28, up from $317 million, or $1.03 per share.

Wall Street expected per-share earnings of $1.30.

Across the board, revenue was up 9 percent to $8 billion.

Founder, chairman and CEO Frederick W. Smith credits success in part to a “firm focus on delivering the Purple Promise” — the next-day guarantee his company made standard around the world — plus steady growth and meticulous attention to productivity.

All three came together Dec. 19, when FedEx delivered 8.9 million packages, 40 percent more than an average day and 800,000 more than it delivered on its busiest day in 2004.

The company’s operating margin improved from 7.5 percent to nearly 9 percent, fast approaching the 10 percent FedEx has promised for close to two years.

Shortly after the call with analysts, Jon Langenfeld at Robert W. Baird was recommending the stock, saying “FedEx is benefiting from a healthy parcel market, solid economy and internal focus on margin improvement.”

Shares closed Wednesday at $114.44, up $1.22.

Alan Graf, Chief Financial Officer, told analysts “to keep an eye on the fourth quarter,” when FedEx predicts earnings in the $1.65-$1.80 range.

In January, FedEx bought out joint venture partner DTW Group in China for $400 million, giving it sole ownership of the international priority business and DTW’s domestic express network across China.

Late this month, the company will add three more flights a week into China, giving it 26 routes — more than any carrier in the world — in the fastest- growing economy in the world.

It also expects to pick up business from last week’s bankruptcy at APX, the California firm with annual sales in excess of $700 million that specialized in business-to-consumer shipping using the post office for final delivery.

In the company’s overnight business, the margin hedged up 1.5 points to 8.4 percent, pushing operating income up 31 percent to $446 million.

“Total salaries and benefits grew 3 percent, but overall revenue grew 8 percent. That’s very significant productivity,” said David Bronzcek, president and chief executive of the Express division, still the company’s core business, accounting for two-thirds of revenue and 60 percent of profit.

Feeding it is the rapidly growing international business, where daily package volume was up 10 percent and revenue grew 12 percent.

“My concern is that leverage works for you and against you,” said Morgan Keegan analyst Art Hatfield. “Will FedEx be able to maintain the margins when the economy slows down.”

World exports grew 6.5 percent in 2005, markedly less than the 9 percent growth in 2004.

“The good thing about the worldwide economy is that it’s not just any one country,” said A.G. Edwards analyst Donald Broughton. “FedEx is the gatekeeper of global trade.”

Stateside, revenue per package was up 8 percent, although overnight volume dropped 3 percent as FedEx continues to shift lower-yielding, second- and third-day deliveries to its ground network.

“The reality is that FedEx Ground can handle that package more effectively with the same service commitment than Express,” said Satish Jindel, Pittsburgh-based transportation analyst.

Ground, which has become the company’s second-largest division since FedEx acquired Caliber System Inc. in 1998, pulled in $1.4 billion in revenue and improved margins better than a full percentage point to 13.7.

At FedEx Freight, revenue was up 14 percent to $848 million, also on improved margins.

Both sectors are catching a tailwind driven by suppliers wanting to be closer to their customers, said Ted Scherck, president of The Colography Group.

“It used to be a business could control its shipping based on how its distribution was set up and where its sales force was,” he said. “Now, with the Internet, I can’t control where my customer is going to be. I need to be close to them because the value-to-pound ratio of the goods I’m shipping is so low it won’t support high-price distribution system.”

It’s the reason more warehouse square footage was added this country last year than any year in history. It’s also the reason that two-thirds of domestic cargo now travels less than 600 miles to market — the distance a truck can reliably travel in one day — down from over a 1,000 miles a few years ago.

“Those regional warehouses,” Scherck said, “are the traffic that is feeding FedEx Ground, FedEx Freight and even FedEx Express.”

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