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Over the weekend we made our forecast for the FedEx (NYSE:FDX) earnings report, saying “We think the risks lie to the downside due to consumer weakness and the read-through from box makers.” As it turns out, we nailed this one.

FedEx Reports Third Quarter Earnings

FedEx Corp. today reported earnings of $1.35 per diluted share for the third quarter ended February 28, compared to $1.38 per diluted share a year ago. Third quarter results were negatively impacted by a slowing economic environment, lower fuel surcharges and severe winter storms, with the storm impact estimated to be $0.06 per diluted share. Results for the quarter also include an $0.08 per diluted share benefit from a reduction in the company’s effective tax rate.

FedEx Corp. reported the following consolidated results for the third quarter:

• Revenue of $8.59 billion, up 7% from $8.00 billion the previous year
• Operating income of $641 million, down 10% from $713 million a year ago
• Operating margin of 7.5%, down from last year’s 8.9%
• Net income of $420 million, down 2% from $428 million a year ago

Total combined average daily package volume at FedEx Express and FedEx Ground grew 4% year over year for the quarter, led by ground and international express package growth.

“The U.S. economy grew at a lower rate than we expected in the third quarter, and we saw continued adjustments in the automotive and housing markets. I believe, however, this represents a healthy transition for the economy as it phases into a more sustainable growth rate,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer. “FedEx is in excellent position to take full advantage of global economic-growth trends and deliver overall outstanding financial results in the long run.”

Consensus estimates called for $1.33 in EPS and $8.7 billion in revenue. With a net $0.02 benefit from one-time items, the EPS number was right in line but sales were light. For next quarter the Street expected $9.3 billion in revenues with $2.03 in EPS, while for the full year they were hoping for $6.78 on $35.5. billion. The midpoint of the guidance range provided by the company is disappointing.

For the fourth quarter, earnings are expected to be $1.93 to $2.08 per diluted share, while earnings for the full year are expected to be $6.45 to $6.60 per diluted share. Excluding the net impact of the costs associated with the new pilot labor contract, the updated guidance for fiscal 2007 is $6.70 to $6.85 per diluted share, an increase of 12% to 15% year over year excluding the impact of last year’s non-cash lease accounting charge.

Given that the disappointment appears to be in line with our expectations (which were previously discussed), we have little to add here.

FDX 1-yr chart:

fdx

FedEx F3Q07 (Qtr End 2/28/07) Earnings Call Transcript

Source: FedEx's Earnings Disappointment: No Surprises Here