(FDX) FedEx Tops Earnings Forecast on Strong Volume

Before the opening bell, FedEx Corporation (FDX), the world’s second-largest package delivery company, reported fourth quarter 2011 adjusted earnings of $1.75 per share. The quarter’s earnings outpaced the Zacks Consensus Estimate by 3 cents and increased 32% from $1.33 earned in the year-ago quarter.

Stronger results were aided by a higher fuel surcharge that offset the rising fuel prices. For fiscal 2011, FedEx reported adjusted earnings of $4.90 per share, up 30% from $3.76 in 2010.

Total revenue climbed 12% year over year to $10.55 billion in the reported quarter and surpassed the Zacks Consensus Estimate of $10.36 billion. The outperformance was attributable to improved ground and international express shipments as well as strong yield initiatives. Further, the Freight segment returned to profitability during the quarter. Fiscal 2011 revenue increased 13% year over year to $39.3 billion.

Operating income increased 28% year over year to $888 million, resulting in operating margin of 8.4% compared with 7.4% in the year-ago quarter. Operating expenses increased 11% year over year to $9.66 billion mainly due to high fuel cost, which was 44% higher than the year-ago quarter.

For fiscal 2011, operating income was $2.38 billion, up 19% year over year and operating expense increased 13% year over year to $36.9 billion.

Segment Results

FedEx Express revenue was $6.63 billion in the fourth quarter, up 13% year over year. The increase was primarily driven by exports from Asia. Operating income improved 4% year over year to $429 million but the operating margin dropped 50 basis points to 6.5%.

The FedEx International Priority (IP) average daily package volume expanded 6% year over year while revenue per package grew 8%. U.S. domestic revenue per package rose 10% year over year with a slight decline in the U.S. domestic average daily package volume.

FedEx Ground revenue rose 15% year over year to $2.26 billion. The increase can be credited to package volume growth at FedEx Ground as well as FedEx SmartPost. Operating income expanded 31% year over year to $417 million while operating margin contracted 210 bps year over year to 18.4% in the reported quarter.

FedEx Ground average daily package volume increased 6%, while revenue per package grew 7%. FedEx SmartPost average daily volume climbed 24%, while revenue per package grew 8%.

FedEx Freight revenue increased 6% year over year to $1.31 billion, reflecting 13% higher LTL (less-than-truckload) yield, partially offset by lower average daily LTL shipments (down 8%). The segment returned to profitability in the quarter due to strong yield growth and efficiencies resulting from the combination of FedEx Freight and FedEx National LTL.

FedEx Freight recorded an operating income of $42 million compared with an operating loss of $36 million in the year-ago quarter. Operating margin was 3.2% versus (2.9%) in the prior-year quarter.


FedEx exited the quarter with cash and cash equivalents of $2.3 billion compared with $1.9 billion in the year-ago quarter. Long-term debt was flat year over year at $1.67 billion.

The company spent $731 million in the fourth quarter, down 12% year over year. Fiscal 2011 capital expenditure climbed 22% to $3.4 billion.


FedEx projects earnings in the range of $1.40 to $1.60 per share for the first quarter of 2012. The mid-point ($1.50) is higher the current Zacks Consensus Estimate of $1.42. FedEx also expects its fiscal 2012 earnings in the range of $6.35 to $6.85 per share. The mid-point ($6.60) is also above the current Zacks Consensus Estimate of $6.49.

FedEx expects capital spending of $4.2 billion for fiscal 2012.

Our Analysis

We believe improved economy, strong yields, restructuring of the Freight segment, increased pricing and volumes across all revenue segments will generate strong revenue and earnings in fiscal 2012.

However, FedEx invests significantly in more fuel-efficient aircraft, including Boeing Co.’s (BA) 777s and 757s. Any delay in the delivery of aircraft could restrict its profitability ahead. Further, competitive threats from its primary competitor United Parcel Service Inc. (UPS), unionized workforce and rising fuel price may limit the upside potential of the stock.

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

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