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FedEx Beats EPS, Keeps Guidance - Analyst Blog

Before the opening bell, FedEx Corporation ( FDX ), the world's second-largest package delivery company, reported second quarter fiscal 2012 adjusted earnings of $1.57 per share. The quarter's earnings outpaced the Zacks Consensus Estimate of $1.52 and were 35% above $1.16 earned in the year-ago quarter.

Total revenue climbed 10% year over year to $10.59 billion and missed the Zacks Consensus Estimate of $10.605 billion. The year-over-year improvement was attributable to continued improvement in FedEx Ground, healthy performance by FedEx Freight and strong yield initiatives.

Operating income shot up 66% year over year to $780 million in the reported quarter. Operating margin also showed an increase of 250 basis points (bps) to 7.4%from 4.9% in the year-ago quarter.

Operating expenses rose 7% year over year to $9.8 billion mainly due to a 28% rise in the fuel cost from the year-ago quarter.

Segment Results

FedEx Express revenue was $6.58 billion in the reported quarter, up 10% year over year. Operating income climbed 30% year over year to $342 million, resulting in an 80 bps expansion in operating margin to 5.2%.

The FedEx International Priority ( IP ) average daily package volume fell 3% year over year due to weak Asian demand while revenue per package (yield) grew 11% on higher fuel surcharge. U.S. domestic revenue per package rose 12% year over year despite a 4% decline in the U.S. domestic average daily package volume.

FedEx Express is rightsizing its aircraft fleet. The company intends to replace the old MD10 aircraft with the new 767-300F from The Boeing Company ( BA ) between 2014 and 2018. Additionally, FedEx is also delaying the delivery of 11 Boeing 777F aircraft to balance the demand for air network capacity.

FedEx Ground revenue rose 13% year over year to $2.34 billion attributable to package volume growth at FedEx Ground as well as FedEx SmartPost. Operating income grew 34% year over year to $398 million, resulting in operating margin of 17% compared with 14.3% in the year-ago quarter. FedEx Ground average daily package volume increased 4% and revenue per package grew 8%. FedEx SmartPost average daily volume expanded 17% and revenue per package rose 4%.

FedEx Freight revenue increased 9% year over year to $1.33 billion, reflecting 8% higher LTL (less-than-truckload) yield, partially offset by lower average daily LTL shipments (down 3%). FedEx Freight recorded an operating income of $40 million compared with an operating loss of $91 million in the year-ago quarter.

Operating margin was 3% versus (7.5%) in the year-ago quarter. The strong performance was driven by operational efficiency from the combination of FedEx Freight and FedEx National LTL completed early this year.

Liquidity

FedEx exited the second quarter with cash and cash equivalents of $1.896 billion compared with $1.877 billion in the year-ago quarter. Long-term debt reduced to $1.25 billion from $1.67 billion at the end of May 31, 2011.

The company spent $1.1 billion in the quarter, up 6% year over year.

Guidance

FedEx has projected earnings in the range of $1.25 to $1.45 per share for the third quarter of 2012. The mid-point ($1.35) is higher than the current Zacks Consensus Estimate of $1.33.

Based on rising fuel prices and moderate economic growth, FedEx reaffirmed its fiscal 2012 earnings projection of $6.25-$6.75 per share. The mid-point ($6.60) is above the current Zacks Consensus Estimate of $6.30.

FedEx continues to expect capital spending of $4.2 billion for fiscal 2012.

Our Analysis

Despite economic volatility, we believe all three segments of FedEx will continue to perform well. The company expects continued top-line growth in Ground and Freight based on strong yields, ongoing efficiency plans, volume expansion and cost management.

At FedEx Express, the company is realigning its network capacity to match weak international volumes due to the drop in Asian demand. Further, FedEx has taken several initiatives like reducing flights and frequencies as well as redeploying equipment in other networks to lower costs.

Nevertheless, huge investments in aircraft and vehicles, competitive threats from United Parcel Service Inc. ( UPS ), a unionized workforce and steeper fuel prices may limit the upside potential of the stock.

We are currently maintaining our long-term Neutral rating on FedEx. The stock retains the Zacks #3 Rank (Hold) for the short term (1-3 months).

BOEING CO ( BA ): Free Stock Analysis Report

FEDEX CORP ( FDX ): Free Stock Analysis Report

UTD PARCEL SRVC ( UPS ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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