FedEx Gains After Pledging Cuts as Economy Presses Profit
FedEx Corp. (FDX), operator of the world’s largest cargo airline, climbed after pledging “significant cost reductions” as slowing economic growth pressures profits.
FedEx’s express unit, which accounts for the bulk of sales, is developing a detailed strategy to improve efficiency in its operating expenses, Chief Financial Officer Alan Graf said on an earnings call. The Memphis, Tennessee-based company said earlier this month it retired 24 jet freighters and would offer more details late this year on its cost-savings plan.
FedEx rose 2.8 percent to $91.01 at the close in New York. The largest increase in two weeks, the move erased declines following a lower profit forecast than analysts estimated.
“The shares probably bounced back up based on the company’s plan to introduce some new cost savings” at an investor conference in October, David Campbell, an analyst at Thompson Davis & Co. in Richmond, Virginia, said in a telephone interview. “It will probably allow the company to earn more than what they are estimating in their release for 2013.”
FedEx predicted profit of $6.90 to $7.40 a share in the fiscal year through May, compared with an average estimate of $7.38.
Revenue and earnings growth will be impacted by “weaker economic conditions” such as the European debt crisis, and slowing growth in Asia, executives said on the call. Customers are shifting from premium to deferred products as they seek to reduce shipping expenses, a trend expected to continue in 2013, executives said.
An economic bellwether because it carries everything from mobile devices to pharmaceuticals, FedEx forecast U.S. economic growth of 2.2 percent for this fiscal year, said Jess Bunn, a company spokesman. That’s down from a forecast of 2.3 percent in December, he said.
The tepid growth, which trails FedEx’s projections a few years ago, prompted the restructuring plans, Graf said.
“For our aspirational goals we needed a little bit stronger growth than what we’ve had and what we’re actually looking for,” he said. “We now realize we’ve got to adjust the networks that we built for higher gross domestic product growth than we’re actually seeing.”
Net income for the fiscal fourth quarter that ended in May fell 1.4 percent to $550 million, or $1.73 a share, from $558 million, or $1.75, a year earlier. Revenue rose to $11 billion from $10.6 billion.
Average daily package volume in the U.S. fell 4.9 percent in the period, a more rapid decline than in the three months through February, FedEx said.
On the same basis, international priority shipments also dropped more rapidly, falling 3.4 percent compared with 1.1 percent in the prior three-month period.
“International priority was on this nice trajectory and that seems to have hit a soft patch here,” said Peter Nesvold, an analyst with Jefferies & Co. in New York. FedEx was “optimistic about what international priority volumes would look like this quarter, and it looked like there would be growth.” Nesvold has a hold rating on the shares, while Thompson Davis’s Campbell assigned a buy rating.
The company still expects to increase revenue and earnings this fiscal year, “despite modest growth in the global economy,” Graf said on the call.
U.S. GDP forecasts for 2012 and 2013 were cut by economists at Morgan Stanley in New York last week in part because of the intensification of the European debt crisis.
The U.S. will expand 2 percent this year, down from a previous estimate of 2.3 percent, and 1.7 percent next year rather than 2 percent, Morgan Stanley said.
Manufacturing grew at a slower pace in May as factories tempered production and pared inventories in response to weakness in the global economy, according to a June 1 report from the Institute for Supply Management.
The ISM’s factory index fell to 53.5 after reaching a 10- month high of 54.8 in April. Readings greater than 50 signal expansion.
“Customers in general are being fairly conservative in terms of how they’re managing their supply chains until they see a little stronger growth,” Michael Glenn, head of FedEx Services, said on the call.
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