FedEx Guidance Cut Doesn't Materially Impact Fair Value

Sep.20.12 | About: FedEx Corporation (FDX)

International shipping giant FedEx (NYSE:FDX) reported slightly better-than-expected fiscal year 2013 first-quarter results Tuesday morning, but the company reduced its full-year guidance range. Revenue grew 3% year-over-year to $10.8 billion, slightly better than consensus expectations. Earnings were also better than consensus estimates, falling just a penny from last year to $1.45 per share. We are sticking with our fair value estimate despite the lowered full-year outlook. For an in-depth look at FedEx's intrinsic value estimate based on a robust discounted cash flow analysis, please click here.

FedEx blamed sluggish economic growth due to weak end market demand as the main driver of weakness. However, its customers are also opting for slower and cheaper shipping methods. FedEx Express, the firm's largest segment, saw revenue grow just 1% year-over-year to $6.6 billion, while operating income fell 28% to $207 million. U.S. domestic volumes fell 5%, though revenue per package increased 2%. International results in the segment were slightly stronger, but the category carries lower margins, and the company did not collect as much revenue from fuel surcharges.

Meanwhile, FedEx Ground saw revenues jump 8% to $2.5 billion on 5% higher volume and increased average rates. Due to strength in e-commerce, operating income grew 9%, to $445 million. Freight revenues jumped 5% to $1.4 billion, with operating income increasing 114% to $90 million, thanks to operating efficiency gains and solid volume growth. The firm is seeing cheaper shipping options surge in popularity as customers are becoming less willing to pay up for quick delivery. We think the change is in part a result of constrained consumer spending, but also represents a symptom of gains in corporate supply chain management. Companies are becoming better at shipping packages in a timely manner, reducing order lag and the need for premium shipping options.

Going forward, FedEx slashed its full-year earnings per share guidance to $6.20-$6.60 (excluding cost savings) from its previous range of $6.90 to $7.40, and well below the consensus estimate of $7.44. The firm also cut its second quarter guidance to $1.30-$1.45 per share, well below the $1.67 consensus estimate. However, the firm expects a net rate hike of 3.9% in hopes that better pricing will offset lower expected volumes. FedEx expects economic growth to deteriorate, though we're not convinced macroeconomic growth will remain materially weak for any extended period of time. Management noted that exports have fallen faster than GDP during the past few months, and they think oil prices will continue to rise, pressuring profits.

After considering the high level of uncertainty in the global economy, a possible temporary shift in consumer behavior toward cheaper shipping options, and rising input costs, we think FedEx remains fairly valued at this time. With a Valuentum Buying Index (our stock-selection methodology) score of 6, we aren't interested in adding the name to the portfolio of our Best Ideas Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.