FedEx Corporation’s (FDX) third quarter fiscal 2011 earnings slipped by a penny but was a nickel above the year-ago earnings. The company has guided fourth quarter and fiscal 2011 earnings above the Zacks Consensus Estimates.
Third Quarter Details
FedEx, the world’s second-largest package delivery company, reported third quarter (ending February 28, 2011) adjusted earnings of 81 cents per share, before the opening bell.
Reduced shipping volume and increased costs led to lower-than-expected earnings. Additionally, unusually severe winter storms during the quarter disrupted the company’s operations.
On a reported basis, net income dropped 3% year over year to $231 million on the resumption of certain 401(k) employee compensation programs, higher pension and medical costs, increased aircraft maintenance expenses, reinstatement of merit salary increases as well as cost associated with the combination of FedEx Freight and FedEx National LTL operations.
Total revenue climbed 11% year over year to $9.66 billion and beat the Zacks Consensus Estimate of $9.59 billion. Improved performance was attributable to strong demand for package-delivery services, given continued growth in global economy, as well as strong yield initiatives.
Operating income declined 6% year over year to $393 million, resulting in operating margin of 4.1% compared with 4.8% in the year-ago quarter. Operating expenses increased 12% year over year to $9.27 billion mainly due to high fuel cost, which exacerbated 30% from the year-ago quarter.
Segment Results
FedEx Express revenue was $6.05 billion, up 11% year over year. The increase was primarily driven by exports from Asia and Europe. Operating income deteriorated 33% year over year to $178 million with operating margin coming in at 2.9%, down from 4.9% in the year-ago quarter. The FedEx International Priority (IP) average daily package volume expanded 5% year over year while revenue per package grew 7%.
FedEx Ground revenue rose 14% year over year to $2.18 billion. The increase can be credited to package volume growth at FedEx Ground as well as FedEx SmartPost. Operating income improved 26% year over year to $325 million while operating margin expanded 140 bps year over year. FedEx Ground average daily package volume increased 6%, while yield grew 5% during the reported quarter. FedEx SmartPost volume climbed 17%, while yield grew 7%.
FedEx Freight revenue increased 8% year over year to $1.12 billion, reflecting 11% higher LTL (less-than-truckload) yield partially offset by lower average daily LTL shipments (down 6%). The segment posted an operating loss of $110 million compared with operating income of $107 million in the year-ago quarter.
Effective January 30, FedEx combined its FedEx Freight and FedEx National LTL operations into a new unit “FedEx Freight.” This combination resulted in one-time cost of $43 million in the third quarter due to lease termination costs and severance expenses.
Guidance
FedEx projects earnings in the range of $1.66 to $1.83 per share for the fourth quarter of 2011. The mid-point of $1.75 per share is higher the current Zacks Consensus Estimate of $1.68 per share. FedEx also expects its fiscal 2011 earnings in the range of $4.83 to $5.00 per share. The mid-point of $4.92 is also above the current Zacks Consensus Estimate of $4.91.
Including FedEx Freight combination costs and the legal reserve, earnings are expected to be $4.49 to $4.66 per share for 2011. FedEx continues to expect capital spending of $3.5 billion.
Our Analysis
We believe continued cost management, positive yield trends and the execution of the new FedEx Freight unit strategy will continue to boost revenue and margins in the fourth quarter and fiscal 2012.
On the flip side, FedEx’s primary competitor United Parcel Service Inc. (UPS) poses a threat. The company’s earnings will be adversely affected by rising fuel prices due to the ongoing political turmoil in the Middle East and North Africa. The restructuring of the Freight segment will also pressure overall margins and earnings over the next several quarters. Also, the near-term impact of Janpan’s earthquake and Tsunami on operating costs remains unclear.
Hence, we are currently maintaining our long-term Neutral rating on FedEx supported by the Zacks # 3 (Hold) Rank.
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