FedEx Corporation (FDX), the world’s second-largest package delivery company, is slated to release its third quarter 2011 earnings on March 17, before the market opens.
The current Zacks Consensus Estimate for the third quarter is 83 cents, representing an 8.75% annualized growth.
FedEx had negative surprises of 0.83% and 11.45% in the last two quarters (first and second quarters, respectively). The third quarter is also expected to be dampened by high fuel costs and severe winter storms in the U.S. and Europe from December. Earnings are expected to decline by 25 cents per share in the third quarter.
FedEx expects adjusted earnings, excluding FedEx Freight combination costs, in the range of 70 cents to 90 cents per share for the quarter, compared with 95 cents to $1.15 guided during second quarter earnings.
Bad weather and higher fuel prices will also hurt fiscal 2011 results. Management guided fiscal 2011 earnings between $5.00 and $5.30 per share in its second quarter conference call.
Second Quarter Flashback
In the second quarter, FedEx’s earnings missed the Zacks Consensus Estimate by 15 cents and was 6 cents below year-ago earnings. Higher pension and aircraft maintenance expenses, as well as the reinstatement of certain 401(k) employee compensation programs, put a drag on the company’s operating performance during that quarter.
Total revenue climbed 12% year over year on solid travel demand and a revival in the economy, but was below the Zacks Consensus Estimate. All the company’s segments, except FedEx Services, contributed to revenue growth.
Agreement of Analysts
Estimates for the third quarter have been trending downward over the last 30 days. Twenty-two analysts out of 23 have made downward revisions while none have moved in the opposite direction. Over the last 7 days, no revisions were made by analysts.
For fiscal 2011, out of 25 analysts, twenty revised their estimates downward over the last 30 days and one made a similar revision over the last 7 days. None of the analysts made positive revisions to the estimates.
Analysts have turned cautious due to surging fuel prices as well as disruptions due to bad weather in December. They also predicted that earnings at FedEx in the second half will be restricted by several cost headwinds, such as an increase in pension expense, higher volume-related aircraft maintenance expenses and resumption of certain 401(k) employee compensation programs.
Furthermore, effective January 30, 2011, FedEx combined its FedEx Freight and FedEx National LTL operations. The estimated cost of this program is expected to be $140 million to $170 million.
Magnitude—Consensus Estimate Trend
The magnitude of revisions for the third quarter has been static at 83 cents per share over the last 7 days. The Zacks Consensus Estimate reduced drastically from $1.04 expected 30 days ago. However, the third quarter expectation is above management’s guidance (midpoint is 80 cents).
For full-year 2011, the Zacks Consensus Estimate is $4.91, down from $4.92 over the last 7 days. The fiscal 2011 Zacks Consensus Estimate also dropped from $5.12 over the last 30 days. The Zacks Consensus Estimate for 2011 reflects a significant 30.49% gain year over year.
We can see that all the negative sentiments have been taken into account and, thus, FedEx might beat the Zacks Consensus Estimate in the third quarter (ending February 2011) as its primary competitor United Parcel Service Inc. (UPS) did in its recently concluded quarter (ended December 2010).
The world’s largest package delivery company, United Parcel,reported adjusted earnings of $1.08 per share in the fourth quarter that surpassed the Zacks Consensus Estimate by 3 cents and the year-ago earnings by 33 cents. Despite several near-term headwinds such as rising fuel prices, bad weather conditions, higher pension expense, and negative currency translation, United Parcel is expected to generate record earnings per share in 2011.
Our Analysis
We believe FedEx will benefit from moderate economic growth. Volume growth and strong yield across all the revenue segments will also facilitate the company to generate strong revenue and earnings upside. Further, a solid balance sheet and adequate financial flexibility along with continued cost management will create favorable operating leverage going forward.
The company reiterated its long-term goals of 10.0% revenue growth per year, more than 10.0% operating margin, earnings per share in the range of 10.0%–15.0% per year, improve cash flows, and increasing returns on invested capital.
However, reinstatement of employees’ compensation program, increased pension expense and aircraft maintenance expense along with steep fuel prices will shrink near-term earnings growth. We believe all these factors have been largely discounted in the current share price.
Although operational weakness and restructuring of the Freight segmentwillpressure overall margins and earnings over the next several quarters, we believe it will lead to profitability in the medium term.
Hence, we are currently maintaining our long-term Neutral rating on FedEx supported by the Zacks # 3 (Hold) Rank.
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