FedEx Delivers a Cautionary Message

Shares fell Wednesday as the company posted solid second-quarter results but warned of a tougher third quarter

FedEx's (FDX) CEO Frederick W. Smith on Dec. 20 announced stronger second quarter income, as his customers shipped more packages and lower fuel prices boosted his profits. He warned of a tougher third quarter but remained optimistic about the global economy's growth in 2007.

The Memphis package deliverer, seen by many as a bellwether for the economy, had net income for the second quarter ended Nov. 30 of $511 million, up 8% from the same period of 2005. Businesses are shipping more packages and volumes have been solid this holiday season, FedEx said.

"Earnings for our second quarter were better than forecast primarily due to lower than expected fuel prices, slightly stronger than anticipated growth at FedEx Ground and insurance proceeds related to Hurricane Katrina," said CFO Alan B. Graf, Jr.

FedEx has been delivering more packages as commercial business improves and the company's home delivery service keeps growing. FedEx Ground average daily package volume grew 14% year over year.

The company's earnings amounted to $1.64 per diluted share during the quarter, including costs associated with a new pilot labor contract at FedEx Express. Excluding such costs, second quarter earnings were $1.89 per diluted share. The mean analyst estimate had been for $1.76 per share, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial.

"FedEx continues to deliver outstanding financial results, and I am confident about our business going forward," said CEO Smith in a press release Dec. 20. "Package volumes are solid this holiday season, and we see continued global economic growth in 2007."

CFO Graf said year over year earnings comparisons are difficult because of the impact of fuel prices, which had spiked following Hurricane Katrina in August, 2005. To offset high prices during that period, FedEx had set additional charges that only came into effect in Dec. 2005, giving a boost to the year ago third quarter's results.

Fuel prices fell a few months ago. Now Graf thinks his company's earnings will dip in the third quarter this year before recovering again in the fourth. He says earnings will be between $1.20 and $1.35 per diluted share in the third quarter and then from $1.98 to $2.13 EPS in the fourth.

The company tightened its annual earnings guidance range to $6.35 to $6.65 EPS. The mean analyst estimate for the fiscal year had amounted to $6.82 per share, according to StarMine.

Investors sold the stock 2.2% to $111.54 per share in early trading on the New York Stock Exchange.

"We think today's share price correction provides an enhanced buying opportunity," Standard & Poor's Corp. analyst Jim Corridore said in a research note. (S&P, like, is owned by The McGraw-Hill Companies.) He maintained a strong buy opinion and $143 per share target price on the stock.

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