FedEx Corporation (FDX), the world's second-largest package delivery company, is slated to release its third quarter fiscal 2012 earnings on March 22, before market opens. The current Zacks Consensus Estimate for the third quarter is $1.36, representing a substantial 67.84% annual growth.
With respect to surprises, FedEx had a 0.78% average positive earnings surprise in the trailing four quarters.
At its second quarter 2012 conference call, FedEx projected adjusted earnings in the range of $1.25 to $1.45 per share for the third quarter. The company also reaffirmed its fiscal 2012 earnings projection of $6.25–$6.75 per share based on rising fuel prices and moderate economic growth.
Second Quarter Flashback
FedEx’ adjusted earnings outpaced the Zacks Consensus Estimate and the year-ago earnings on the back of strong revenue growth.
Total revenue improved from the year-ago quarter but was lower than the Zacks Consensus Estimate. The year-over-year improvement was attributed to continued improvement in FedEx Ground, healthy performance by FedEx Freight and strong yield initiatives.
Fuel costs spiked 28% during the quarter and were responsible for higher operating expenses.
Agreement of Analysts
Estimates reflect a negative bias for the third quarter over the last 30 days with 2 out of 21 analysts revising their estimates downward. None of the analysts made any positive revision over the last 7 and 30 days.
Fiscal 2012 estimates reflect an upward bias. Out of the 23 analysts, 1 and 2 made positive revisions in the last 7 and 30 days, respectively, while 2 analysts moved in the opposite direction in the last 30 days.
The analysts made downward revisions primarily due to surging fuel prices and lower mail volumes, which declined more than 20% since 2006 because of increased reliability on electronic communication.
With the drop in mail volumes, FedEx’ revenue from postal service is expected to shrink to less than a billion annually. The future of FedEx largely hinges on its Express segment, which is also affected by weak Asian demand. Nevertheless, the company is realigning its network capacity to match weak international volumes due to the drop in Asian demand.
FedEx Express is taking several initiatives including reducing flights and frequencies as well as redeploying equipment in other networks to reduce costs. FedEx expects a multibillion-dollar investment in new aircraft to provide significant fleet efficiency gains and benefit the Express division over the long term. Further, strong package shipments and higher prices are expected to offset rising fuel prices.
Moreover, the recent deal to acquire TNT Express by its largest rival United Parcel Service Inc. (UPS) serves as a major headwind to FedEx. United Parcel will become the global leader in the logistics industry with annual revenues of more than €45 billion ($60 billion) post-acquisition and will enjoy around 16% market share in Europe. FedEx has only 3% of market share in Europe.
However, the network restructuring program would enhance FedEx’s competitive position against United Parcel throughout Asia.
Magnitude — Consensus Estimate Trend
The magnitude of revisions for the third quarter has been static at $1.36 per share over the last 7 and 30 days. The fourth quarter expectation is within management’s guidance range.
For fiscal 2012, the Zacks Consensus Estimate is $6.38, unchanged over the last 7 and 30 days. The Zacks Consensus Estimate for 2012 is also within management’s guidance and reflects a significant 30.27% gain year over year.
Despite moderate economic growth, we believe earnings and revenue will continue improving going forward on strong demand, better pricing, continued yield (revenue per package) improvement, industrial production growth and diminishing cost headwinds. Further, solid international Express growth from rightsizing capacity, market share gains at Ground and a profitable Freight business from network restructuring should lead to further earnings improvement.
However, increased investments, competitive threats,unionized workforce and steeper fuel prices could limit the upside potential of the stock.
We are maintaining our long-term Neutral recommendation on FedEx. The stock retains a Zacks #3 (Hold) Rank for the short term.