On Oct 4, we maintained our Neutral recommendation on
). While the company's first quarter fiscal 2014 earnings
surpassed the Zacks Consensus Estimate, revenues were in line
with our expectation. Currently, the Zacks Consensus Estimate for
the company is pegged at $1.62, representing an annualized growth
rate of 16.32%.
FedEx remains on a solid growth trajectory with significant
earnings momentum. For fiscal 2014, the company estimates 7-13%
earnings per share growth from fiscal 2013 figures. FedEx
foresees modest growth in the global economy, driven by gradual
improvements in Europe and China. Based on this, the company
foresees global GDP growth of 2.0% and 2.9% for calendar year
2013 and 2014, respectively.
In addition, we are encouraged by the company's ability to
achieve $1.6 billion in incremental profit at FedEx Express and
its target of 30% improvement in fuel efficiency of its fleet by
Other than gaining $600 million in cost savings through 2016 from
the Voluntary plan, the company expects profits from
infrastructural developments like aircraft modernization,
aircraft maintenance processes, fuel consumption, increased
productivity in pick-up and delivery services. FedEx is
aggressively working on plans to curb over-capacity from Asian
lanes to adjust traffic in lower yield networks and in this
context, it expects to remove some of its networks between U.S.
In fiscal 2014 and beyond, the company expects to increase
capital spending in the Ground segment in order to meet growing
demand. Based on higher demand assumption, FedEx anticipates a
higher return on invested capital (ROIC) from such spending. In
the Freight segment, management expects to further invest in
technology to upgrade network and equipment and automation
planning to enhance customer service levels in fiscal 2014.
However, we expect the global economic environment impacted by
the European debt crisis and tardy Asian growth to remain
detrimental to the company's demand function. As a result, FedEx
is experiencing a demand shift from premium services to deferred
services within FedEx Express as customer preferences drift
toward lower-yielding international services, lower rate per
pound and weight per shipment. This will ultimately have a
negative impact on operating margins.
In addition, the company derives a significant portion of its
revenues from international operations, including business in the
emerging markets. Emerging markets are more volatile than the
developed world, and any broad-based downturn in these markets
could reduce the company's revenues and affect its financial
position. Additionally, the company faces significant market
risks arising from fluctuations in foreign exchange rates,
commodity prices and interest rates.
Going forward, the company expects subdued revenue performance in
the Freight segment in fiscal 2014 due to poor market demand in
Less-Than-Truckload services. Depreciation expenses are also
expected to increase due to accelerated retirement of old
aircraft, which would cost around $74 million in fiscal 2014.
FedEx, which operates with freight forwarding carriers like
United Parcel Service, Inc.
Radiant Logistics, Inc.
Expeditors International of Washington Inc.
) has a Zacks Rank #3 (Hold).
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