FedEx Misses but Doubles Profit

FedEx Corporation (FDX - Analyst Report), the world's second-largest package delivery company, reported first quarter fiscal 2011 adjusted earnings of $1.20 per share. The quarter’s earnings were below the Zacks Consensus Estimate by a penny, but above the year-ago earnings of 58 cents.

Earnings jumped 107% year over year on strong growth in International Express shipment as well as higher volumes in FedEx Ground segment, partially offset by the resumption of certain 401(k) employee compensation programs, higher pension, higher aircraft maintenance expenses as well as operating loss at FedEx Freight.

Total revenue climbed 18% year over year to $9.46 billion, in line with the Zacks Consensus Estimate. The demand for package-delivery services is increasing due to recovery in the economy.

Operating income shot up 99% year over year to $628 million, resulting in operating margin of 6.6% compared with 3.9% in the year-ago quarter. Operating expenses was $8.8 billion, up 15% from the year-ago quarter.

Segment Results

FedEx Express revenue was $5.91 billion, up 20% year over year. The increase was primarily driven by exports from Latin America, Asia and the U.S. Operating income was $357 million in the reported quarter, showing a whopping growth of 243% from the year-ago quarter. FedEx International Priority (IP) average daily package volume expanded 19% year over year while revenue per package increased 4%.

FedEx Ground revenue increased 13% year over year to $1.96 billion. The increase can be credited to package volume growth at FedEx Ground as well as FedEx SmartPost. Operating income increased 37% year over year to $287 million. FedEx Ground average daily package volume increased 7%, while yield grew 5% during the quarter. FedEx SmartPost volume increased 23%, while yield grew 6%.

FedEx Freight revenue increased 28% year over year to $1.26 billion, reflecting higher average daily LTL (less-than-truckload) shipments, which were partially offset by lower yields. The segment posted an operating loss of $16 million compared with operating income of $2 million in the year-ago quarter. A 29% increase was recorded in LTL average daily shipments, while yield fell 3%.

FedEx Services revenue dropped 8% year over year, due to lower copy revenues.

Outlook

FedEx projects earnings in the range of $1.15 to $1.35 per share for the second quarter of 2011. The mid-point of $1.25 per share is well below the current Zacks Consensus Estimate of $1.37 per share. FedEx raised its fiscal 2011 earnings estimate to $4.80 to $5.25 per share from its previous outlook of $4.60 to $5.20. The mid-point of $5.02 is also below the current Zacks Consensus Estimate of $5.24.

FedEx Freight to Combine

FedEx plans to combine its FedEx Freight and FedEx National LTL operations from January 30, 2011. This is expected to reduce operating costs as the company will cut 1,700 workers and close 100 facilities. The transaction will result in one-time charges of $150 to $200 million in the second and third quarters of fiscal 2011.

Dividend

FedEx is expected to pay a quarterly cash dividend of 12 cents per share on common stock to stockholders of record as of September 10. The dividend is payable on October 1.

Our Analysis

Resumption of industrial production growth, improved volume growth, and strong yield initaitives across all the revenue segments will facilitate FedEx to generate strong revenue and earnings growth in fiscal 2011. In addition, the joining of FedEx’ two units -- Freight and National LTL operations will bring back FedEx Freight to its profitability in fiscal 2012. FedEx Freight is currently a headwind for the company. Hence, we are recommending our long-term Outperform rating on the stock.

However, for the short term (3-6 months), we are maintaining our Hold rating, with the Zacks #3 Rank as reinstatement of employees’ compensation program and increased pension expense will dampen near-term earnings growth.