One of the leading parcel delivery companies,
) has sold its Beltsville facility to U.S. based real estate
company, Prologis Private Capital for $27 million. FedEx'
235,000-square-feet Beltsville unit was mainly used as a shipping
and printing center.
We believe that FedEx's decision to sell its assets is in
accordance with the company's plans to realign its operations so as
to match the current demand levels. Global economic downturn has
marred the company's business over the past quarters and the trend
is expected to continue.
The company already foresees that global economic environment
impacted by European debt crisis and slump in Asian growth will be
detrimental to its demand trend. This is expected to result in
demand shift from premium services to deferred services impacting
margins performance negatively.
Further, it apprehends subdued revenue performance in U.S.
domestic package in fiscal 2013 due to continued erosion in
volumes. The poor demand outlook clearly reflects on the company's
earnings projection, which was lowered to $6.20- $6.60 during the
first quarter earnings release from the previous range of $6.90 to
$7.40 per diluted share for fiscal 2013.
To improve the present operational scenario, FedEx is taking
several steps apart from disposing idle assets. In June 2012, the
company announced plans to purchase 19 more Boeing 767 aircraft.
FedEx expects the delivery of these aircraft from 2015 through
2019. These new aircraft are expected to benefit cost structure by
replacing the old fleet of MD-10 and A31-200.
The 767 Boeing will offer similar capacity compared to MD10 with
20% and 30% reductions in operating cost and fuel cost,
respectively. Further, the new planes will ensure cost efficiency
by exchanging equipment like spare parts, tooling and flight
simulators with the existing FedEx' Boeing 757 Fleet.
Additionally, FedEx delayed the delivery of eleven 777 freighter
aircraft that were scheduled to be delivered between 2013 through
2018. We believe the delayed deliveries would help better
utilization of MD-11 fleet on international flights and also lower
overall cost and investment.
We believe these measures will effectively diminish cost
headwinds and aid profitability despite moderate economic growth.
However, increased investments, competitive threats from peers like
United Parcel Service, Inc.
) and lackluster international business could limit the
upside potential of the stock.
We are currently reiterating our long-term Underperform
recommendation on FedEx. For the short term the stock retains a
Zacks #4 Rank (Sell).
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