FedEx Dips on Earnings News

The bellwether delivery giant reported a drop in profits and warned it will be tough to keep up with its long-term earnings growth goal

Package delivery company FedEx (FDX) said Mar. 21 that it's been struggling to grow profits during recent months. Fuel costs cut into profits, while snowstorms made it tougher for trucks to deliver packages. And as the U.S. economy slowed, customers who might have insisted on shipping everything overnight express during easier years downgraded to less expensive services.

Buffeted by such factors, the Memphis (Tenn.) company's net income during the third quarter ended Feb. 28 fell 2% from a year ago to $420 million. "The U.S. economy grew at a lower rate than we expected in the third quarter, and we saw continued adjustments in the automotive and housing markets," said CEO Frederick W. Smith in a press release March 21.

FedEx's earnings results look like they came out within expectations at first blush. Earnings per share amounted to $1.35 during the February quarter, compared to the consensus estimate of $1.33.

Severe winter storms accounted for a 6 cents hit to the EPS. Offsetting the loss, FedEx delivered the market a surprise with its effective tax rate, which was reduced to 33.2%, the result of what the company called "normal and ongoing" tax audits. The surprise tax windfall amounted to around 8 cents per share, which would put FedEx's results in line with its earlier guidance of $1.20 to $1.35 per share. "The numbers were not as good as what it looks," says Satish Jindel, president of SJ Consulting Group Inc. in Pittsburgh.

Investors sold FedEx's stock, which dropped 1.2% to $110.99 on the New York Stock Exchange on Mar. 21.

Still, FedEx's Smith promised better times ahead. He called the U.S. economy's recent performance "a healthy transition" as it "phases into a more sustainable growth rate." FedEx says its earnings will be between $1.93 and $2.08 per share for the fourth quarter ended May, and $6.45 to $6.60 per share for the full fiscal year 2007. The consensus estimates for those periods had been for $1.33 and $6.79, according to Thomson Financial.

However, next year could be worse. FedEx warned that its earnings during fiscal year 2008 may be below its long-term target of 10% to 15% annual earnings per share growth, given slower economic growth and planned investments in the business.

The company has taken numerous steps to bolster itself in the face of a tougher U.S. economy. As far back as the 1980s, Smith, who founded the company, predicted that Asia would become an economic powerhouse. In 1989 he shelled out $895 million to buy Tiger International Inc., a struggling cargo hauler that nonetheless had assets Smith coveted: flying rights into most major Asian airports and a management team with a deep knowledge of the Pacific Rim (see, 4/30/06, "FedEx: Taking Off Like a Rocket Ship").

FedEx has continued to push ahead with this strategy more recently. On Mar. 19, for example, the company's subsidiary FedEx Express announced that it will offer next-business-day domestic express service in China beginning May 28, 2007.

"FedEx is in excellent position to take full advantage of global economic-growth trends and deliver overall outstanding financial results in the long run," Smith said in the press release.