) has curtailed its first quarter of fiscal 2013 outlook citing
uncertain global economy. The company reduced its earnings
estimates to the range of $1.37 to $1.43 per share from the
previous expectation of $1.45 to $1.60 per diluted share.
The company cited issues regarding the current economic
backdrop, which remain a constant headwind for revenue growth in
its key segment, FedEx Express. FedEx foresees the global economic
environment greatly affected by the European debt crisis, while
slump in Asian economy will remain detrimental to its demand
As a result, the company expects that demand would continue to
drift from premium services to deferred services impacting margins
negatively. The company also apprehends subdued revenue performance
in U.S. domestic package in fiscal 2013 due to volume declines.
Hence, we remain cautious over Express margins improvement and
do not foresee much of upside until demand rises in the
international segment and costs improve in its domestic operations.
Further, we expect contract expiry in the U.S. Postal Service
(USPS) that includes FedEx's domestic air transportation services
for USPS' First-Class, Priority and Express Mail, which would
impact Express revenue as it contributes approximately $1 billion
to annual revenues.
Going forward, factors like pension expenses of approximately
$150 million are expected to weigh on earnings for fiscal 2013.
Depreciation expenses are also expected to increase due to
shortened service life of some aircraft.
However, we believe if the global economy rebounds, FedEx will
register strong earnings momentum and improvement in its long-term
growth opportunities. We also foresee that earnings growth in
fiscal 2013 will be aided by increasing profitability in the
Freight segment coupled with continued growth in its Ground
Additionally, improving international revenues and operational
efficiency in FedEx Express will also support earnings going
forward. We expect that these initiatives would substantially
better the company's earning power over the next several years.
Similar to its peers like
United Parcel Service, Inc.
), FedEx has been increasing its freight charges periodically. In
early 2012, the company increased its general rate by 4.9% for
FedEx Ground and FedEx Home Delivery shipments. It also raised
shipping rates by 3.9% for FedEx Express covering U.S. domestic,
U.S. export and import services.
Going forward, FedEx is boosting its international presence by
heavy investment to enhance its existing routes and make strategic
acquisitions. The company is also building a new hub in Guangzhou,
China; with its new headquarters in Shanghai, for catering to 100
new Chinese cities within the next five years.
In terms of acquisitions, the company completed the take over of
Polish courier company Opek Sp. z o.o. in June this year. In July,
the company completed the acquisition of French B2B Express
transportation company, TATEX that deals in domestic ground
business and generates around €150 million in annual revenues.
FedEx's latest buy includes the acquisition of Rapidão Cometa, a
Brazilian transportation and logistics company with revenues of
more than $500 million. The acquisition is expected to strengthen
FedEx's Express business in Latin America.
We believe the investments in organic growth as well as
acquisitions will lead to greater operational efficiencies,
providing a competitive edge, generating significant long-term
synergies, supporting international business growth, and driving
higher earnings, margins and returns over the long-term.
Currently, FedEx retains a Zacks #4 Rank (short-term Sell
rating). We also reiterate our long-term Neutral recommendation on
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