FedEx Corporation (FDX), the world's second-largest package delivery company, reported fourth quarter 2011 results on June 22. Both adjusted earnings and revenue surpassed the Zacks Consensus Estimates and improved from the year-ago results.
Third Quarter Review
Adjusted earnings of $1.75 per share outpaced the Zacks Consensus Estimate by 3 cents and increased 32% from $1.33 earned in the year-ago quarter. Despite rising fuel prices, FedEx reported strong earnings on higher volumes, fuel surcharge and strong yields.
Total revenue improved from the year-ago quarter and surpassed the Zacks Consensus Estimate on improved ground and international express shipments and strong yield initiatives. Strong exports from Asia 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 also increased, reflecting higher average daily less-than-truckload (LTL) yields, but was partially dampened by lower shipments.
Operating expenses grew 11% year over year mainly due to high fuel expenses.Company Guidance
FedEx projects earnings in the range of $1.40 to $1.60 per share for the first quarter of 2012. The mid-point ($1.50) is a penny below the current Zacks Consensus Estimate. FedEx expects its fiscal 2012 earnings in the range of $6.35 to $6.85 per share. The mid-point ($6.60) is also slightly below the current Zacks Consensus Estimate of $6.63.
Agreement of Analysts
The overall trend noticed in the last 7 and 30 days suggests that the analysts are inclined more toward the positive side in estimate revisions for the upcoming quarter and fiscal year.
For the first quarter, 10 out of 22 analysts made upward revisions in the last 30 days and only one analyst moved the estimate up in the last 7 days. Opposite roads were taken by 3 and 1 analyst in the 30 and 7 days, respectively.
For fiscal 2012, 14 and 1 analyst out of 22 revised their estimates upward over the last 30 days and 7 days, respectively. Four and one analyst revised their estimates downward in the same time periods.
The analysts believe FedEx’ earnings and revenue will continue to improve this year on strong demand, improved pricing, moderate economic growth, continued yield (revenue per package) improvement, industrial production growth and diminishing cost headwinds.
Industrial production, the main driver of the company’s volume growth, is expected to be higher than the country’s GDP growth. Notably, Express and Ground is also likely to see solid earnings momentum on the back of a profitable Freight business.
FedEx expects to invest $4.2 billion in fiscal 2012 compared with $3.4 billion in 2011. About 60% of the investments are allocated toward growth projects, including the expansion of FedEx Express' Asian and European networks, FedEx Ground's network, and replacement of vehicles and equipment at FedEx Freight.
In addition, the company continues to invest significantly in fuel-efficient aircraft, including the Boeing 777s and Boeing 757s. The investment will reduce transit time and lead to greater fuel and operational efficiencies providing a competitive edge over its peers. These investments will generate significant long-term savings, support international business growth as well as drive higher earnings, margins and returns.
Further, FedEx is committed to its shareholders in the form of dividends. FedEx’ long-term goals of 10.0% revenue growth per year, more than 10.0% operating margin, cash flow improvement and higher returns on invested capital affirm the analysts’ confidence on the stock.
Magnitude – Consensus Estimate Trend
The magnitude of revision for the first quarter was reduced by a penny to $1.51 over the last 7 days but raised by 8 cents over the last 30 days. The estimate represents a substantial growth of 25.98% annually.
For fiscal 2012, the Zacks Consensus Estimate is $6.63, down by a penny in the last 7 days but up 14 cents over the last 30 days. The Zacks Consensus Estimate reflects a significant 35.40% gain year over year.
With respect to earnings surprises, the company’s fairly good track record is expected to continue in the coming quarters. FedEx produced a positive surprise of 1.74% in the fourth quarter followed by negative surprises in the last three quarters (first, second and third). We believe the positive momentum has started for the stock with the ongoing yield initiatives, profitable Freight segment as well as improved economy and demand.
Neutral on FedEx
We expect FedEx to generate strong revenues and earnings in fiscal 2012 on improved economy, strong yields, restructuring of the Freight segment, industrial production growth, diversified product offerings, diminishing cost headwinds, increased pricing and volumes across all segments.
However, increased investements, competitive threats from its close rival United Parcel Service Inc. (UPS), unionized workforce and steeper fuel price may limit the upside potential of the stock.
Consequently, we are maintaining our long-term Neutral rating on FedEx. The stock retains a Zacks #3 (Hold) Rank.