On Jan 17, 2014, we reaffirmed our Neutral recommendation on
). Although the company's second quarter fiscal 2014 earnings
missed the Zacks Consensus Estimate, the bottom line remained
above the year-ago level. Despite the challenges in the macro
economy, the company delivered strong earnings year over year on
the back of higher revenues at the Ground and Freight segments
coupled with cost control efforts at the Express segment.
Revenues registered year-over-year growth but remained below our
The Zacks Consensus Estimate for the third quarter earnings is
pegged at $1.57 per share.
We expect growth at FedEx to continue in the upcoming
quarters, driven by the ongoing improvements across all its
segments. As a result, the company has also increased its
estimated fiscal 2014 earnings growth to 8-14% per share from
7-13% expected previously. While the company is counting on its
profitability improvement to support higher earnings estimates,
it is also considering ongoing share repurchase program.
The company, as of Nov 30, 2013 repurchased 10 million shares,
which include 7.2 million shares repurchased in the second
quarter. FedEx expects the buyback made in the second quarter to
positively impact earnings by 4 cents per share. The company
currently has 32.2 million shares under its current repurchase
authorization, of which it expects to buy back 11.4 million
shares to an aggregate of $2 billion by the end of fiscal
FedEx, which operates with other carriers like
United Parcel Service, Inc.
Radiant Logistics, Inc.
Expeditors International of Washington Inc
) foresees modest growth in the global economy, driven by gradual
improvements in Europe and China. Based on this, the company
remains positive over growth in real GDP, industrial production,
and consumer spending in calendar year 2014 and 2015 in the U.S.
and globally. FedEx foresees global GDP growth of 2.8% and 3.2%
for calendar year 2014 and 2015, respectively.
FedEx also assumes U.S. GDP growth of 2.4% for calendar year
2014 and 3.0% for 2015. Further, industrial production growth is
estimated at 3.1% and 3.6% in calendar years 2014 and 2015,
respectively. The company is also banking on new business wins.
In Sep 2013, FedEx won a $171 million contract from the U.S.
Department of Defense for small package delivery services for the
military. This contract expires on Sep 30, 2014. FedEx also won a
second defense contract worth $49.8 million for overpacking and
transportation of perishable products for the Defense Commissary
Agency and Defense Logistics Agency, effective Oct 1, 2013.
Unless extended, the contract will expire on Sep 30, 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
will likely witness 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.
The company expects subdued revenue performance in the Freight
segment in fiscal 2014 due to poor market demand in
Less-Than-Truckload (LTL) services. Depreciation expenses are
also expected to increase due to accelerated retirement of old
aircraft, which would cost around $74 million in fiscal 2014. As
a result, we maintain a cautious stance on the company over the
The company currently has a Zacks Rank #3 (Hold).
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