FedEx Corporation, the operator of the world's largest cargo airline reported second quarter earnings this morning and though the headline number was below analyst expectations, net income excluding a one time charge actually came in higher than forecast. Two days after its busiest shipping day of the season yet (Dec 18), the Memphis, Tennessee based shipping giant said that earnings for the second quarter ended Nov. 30 were $511 million or $1.64 a share. This is 8.5% higher than the same period last year and the company also forecasted moderate to strong economic growth for 2007. But the stock was down over 2% in mid-morning trading. So the question is why is FedEx not getting any love from Wall Street today?
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The company's third quarter forecasts have a lot to do with today's slide but taking a deeper look at the second quarter earnings first reveals that revenue came in at $8.93 billion. Analysts were expecting $8.91 billion. Though net income came in at $1.64 a share and the Street had been looking for $1.76 a share, those expectations did not factor in the one time charge FedEx incurred this quarter due to the new contract that it agreed to with the pilot labor union. Expenses related to the new contract worked out to 25 cents a share and therefore, excluding that, the company earned $1.89 ($1.64+$0.25) a share. Therefore, that number beats the $1.76 a share target that Wall Street had set. FedEx saw especially strong growth in its ground delivery business (where it trails rival UPS (UPS: Charts, News, Offers) in market share) as shipment volume rose 14%. Growth in the lucrative international delivery segment also boosted the bottom line.
Holiday shipping was also a big part of the quarter as the period before Thanksgiving is especially heavy because retailers tend to load up on inventories during this time. A 23% increase in online shopping during the first 24 days of November (according to data compiled by comScore Networks) was fully exploited by FedEx as it is heavily embedded in the shipping processes of online retailers. However, traders and investors were a little spooked by FedEx's guidance for the third quarter which started December 1st. The company forecast a bottom line between $1.20 and $1.35 for the third quarter which is lower than what Wall Street was expecting. It also looks weak because the third quarter includes December, a strong holiday shopping and shipping month.
But the reason behind the company's expectation of a softer third quarter has nothing to do with its core operations. The third quarter will be weaker because FedEx expects the fuel surcharges that it imposes on its customers to fall further than they have fallen over the last few quarters. The cargo company's fuel surcharge trails market oil prices by a couple of months and therefore, over the last couple quarters, FedEx has seen a greater decline in oil prices (and consequently in its transportation costs) than in its fuel surcharges. That is expected to change in the third quarter reducing the cushion that the company has enjoyed recently as the surcharges catch up to lower gas prices. Earnings are therefore expected to be lower in the third quarter and are expected to once again pick up in the fourth. Operationally speaking, the company does appear to be in fine shape but it remains to be seen how much market share it can take away from UPS in the ground delivery market and whether it can further expand its international presence.
The Company's principal activities are to provide transportation, e-commerce and supply chain management services. It Operates in four segments: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Kinko's. The services offered by the Company include worldwide express delivery, ground small-parcel delivery, less-than-truckload freight delivery, supply chain management, customs brokerage, trade facilitation and electronic commerce solutions. The Company offers various international packages and document delivery services to 220 countries, as well as international freight services and also offers commercial and military charter services. The Company also provides document solutions and business services, including copying and printing services, signs and graphics, videoconferencing, high-speed wireless and wired Internet access and computer usage. The Company acquired FedEx Kinko's on 12-Feb-2004 and FedEx SmartPost on 12-Sep-2004.
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