One of the leading parcel delivery companies, FedEx Corp. 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).