FedEx Corporation (FDX) lowered its expectation for third quarter 2011 adjusted earnings by 25 cents per share. Severe winter storms and higher fuel prices provoked management to take this drastic step.
The company was compelled to cancel several flights in the U.S. and Europe due to bad weather and unusually high costs. The last trading price of FedEx fell 1.5% following the guidance revision.
FedEx expects adjusted earnings, excluding FedEx Freight combination costs, to be in the range of 70 cents to 90 cents per share for the current quarter compared with 95 cents to $1.15 guided previously. This new guidance assumes stable fuel prices and no further weather impact for the remainder of the quarter.
The winter storms and higher fuel prices are also expected to dampen fiscal 2011 results. Management guided fiscal 2011 earnings between $5.00 and $5.30 per share in its second quarter conference call. FedEx is expected to report its third quarter earnings (ending February 28) on March 17, 2011.
In the second quarter, FedEx’ earnings missed the Zacks Consensus Estimate by 15 cents and were 6 cents below the 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 the recently concluded quarter.
On the other hand, the company’s primary competitor, United Parcel Service Inc. (UPS), outpaced the Zacks Consensus Estimate by 3 cents in the recently concluded quarter (ending December 2010).
Earnings per share showed a substantial 44% growth from the year-ago quarter. For fiscal 2011, United Parcel projects adjusted earnings per share in the range of $4.12 to $4.35, representing an increase of 16% to 22% from the 2010 level.
FedEx new guidance (mid-point of 80 cents per share) is well above the current Zacks Consensus Estimate of $1.04 per share, which represents a substantial increase of 37.01% from the year-ago quarter.
We believe FedEx will benefit from moderate economic growth. Volume growth and strong yield across all the revenue segments will also facilitate the second-largest package delivery company in the U.S. to generate strong revenue and earnings upside. In addition, the merger of two units—Freight and National LTL operations would bring back FedEx Freight to profitability in fiscal 2012.
However, reinstatement of employees’ compensation program, increased pension expense and aircraft maintenance expense along with steep fuel prices will shrink near-term earnings growth.
Hence, we are currently reaffirming our long-term Neutral rating on FedEx with the Zacks # 3 (Hold) Rank.
FEDEX CORP (FDX): Free Stock Analysis Report
UTD PARCEL SRVC (UPS): Free Stock Analysis Report
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