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FedEx Beats, but Lowers Guidance

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FedEx Corporation (FDX - Free Report) reported first quarter fiscal 2013 adjusted earnings of $1.45 per share. The quarter’s earnings surpassed the Zacks Consensus Estimate of $1.40 but missed the year-ago earnings by a penny. The company's earnings were largely hit by lackluster global economy that negatively impacted revenue growth.

Total revenues for the first quarter climbed 3% year over year to $10.79 billion and were above the Zacks Consensus Estimate of $10.70 billion.

Operating income for the quarter inched up 1% year over year to $742 million. Operating margin deteriorated 10 basis points (bps) to 6.9% from 7.0% in the year-ago quarter. Operating expenses rose 2.7% year over year to $10.1 billion.

Segment Results

Quarterly revenues at FedEx Express were $6.63 billion, up 1% year over year. Operating income was down 28% year over year at $207 million, resulting in an operating margin of 3.1%, down 130 bps from 4.4% in the year-ago quarter. The negative impact of lower volumes along with demand shift toward international services with lower profitability affected the operating income of the segment.

The FedEx International Priority (IP) average daily package volume decreased 2.2% for the quarter, while revenue per package (yield) decreased 3.3% due to unfavorable impact of exchange rate fluctuations and lower fuel surcharges. The U.S. domestic revenue per package rose 2% year over year despite a 5% decline in the U.S. domestic average daily package volume. The revenue growth was primarily attributable to higher freight rates that offset lower fuel surcharges.

FedEx Ground revenue increased 8% year over year to $2.46 billion, attributable to volume growth at FedEx Ground. Operating income upped 9% year over year to $445 million, resulting in operating margin of 18.1% compared with 17.9% in the year-ago quarter.

FedEx Ground average daily package volume increased 5% driven by growth in B2B and FedEx Home Delivery services. Revenue per package grew 2% on increased freight rates. FedEx SmartPost average daily volume expanded 18% on increased e-commerce and revenue per package decreased 1% due to higher postal charges.

FedEx Freight revenue upped 5% year over year to $1.40 billion, reflecting increases of 2% in LTL (less-than-truckload) yield and 4% in average daily LTL shipments. FedEx Freight recorded an operating income of $90 million that shot up 114% from $42 million in the year-ago quarter.

Operating margin improved to 6.4% from 3.2% in the year-ago quarter. The strong performance was driven by higher operational efficiency alongside volume and yield growth.

FedEx Services revenue fell 5.4% year over year to $389 million in the first quarter.


FedEx exited first quarter of fiscal 2013 with cash and cash equivalents of $2.7 billion compared with $2.8 billion at the end of fiscal 2012. Long-term debt increased to $2.2 billion compared with $1.3 billion at the end of fiscal 2012. Capital expenditure for the first quarter amounted to $972 million compared to $4 billion at the fiscal year-end 2012.


For the second quarter of fiscal 2013, FedEx has projected earnings per share in the range of$1.30 to $1.45. For fiscal 2013, the company projects earnings per share in the range of $6.20 to $6.60, down from the previous forecast of $6.90 to $7.40 per diluted share. The company maintains its Capital expenditure estimate of approximately $3.9 billion for fiscal 2013.

In addition, the company announced freight rate increases for FedEx Express. The rates will increase by approximately 3.9% for U.S. domestic, U.S. export and U.S. import services, effective January 7, 2013. The company expects to increase freight rates for FedEx Ground and FedEx SmartPost pricing for 2013 during the end of this year.

Our Analysis

Despite moderate economic growth, we believe FedEx is poised to benefit from improved pricing, volume growth, continued yield improvement and diminishing cost headwinds. We expect the strong performance at FedEx ground and FedEx Freight to continue supporting earnings growth for the company. However, increased investments, competitive threats from peers like United Parcel Service, Inc. (UPS - Free Report) , lower international demand and economic volatilities could limit the upside potential of the stock

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

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