Before the opening bell, FedEx Corporation (FDX), the world's second-largest package delivery company, reported first quarter fiscal 2012 adjusted earnings of $1.46 per share. The quarter’s earnings fell short of the Zacks Consensus Estimate by a penny but increased 22% from $1.20 earned in the year-ago quarter.
Total revenue climbed 11% year over year to $10.52 billion and surpassed the Zacks Consensus Estimate of $10.33 billion. The outperformance was attributable to improved FedEx Ground and FedEx Freight performance as well as strong yield initiatives.
Operating income increased 17% year over year to $737 million, resulting in operating margin of 7% compared with 6.6% in the year-ago quarter. Operating expenses grew 11% year over year to $9.78 billion mainly due to 40% higher fuel cost from the year-ago quarter.
Segment Results
FedEx Express revenue was $6.59 billion in the reported quarter, up 12% year over year. Operating income declined 19% year over year to $288 million and operating margin narrowed 160 basis points (bps) to 4.4% due to lower package volume.
The FedEx International Priority (IP) average daily package volume fell 4% year over year while revenue per package (yield) grew 16%. U.S. domestic revenue per package rose 13% year over year with a 3% decline in the U.S. domestic average daily package volume.
Concurrent with the first quarter earnings release, FedEx Express raised its shipping rates by a net 3.9% for U.S. domestic, U.S. export and U.S. import services. The new rates are effective January 2, 2012.
FedEx Ground revenue rose 16% year over year to $2.28 billion attributable to package volume growth at FedEx Ground as well as FedEx SmartPost. Operating income climbed 42% year over year to $407 million, resulting in operating margin of 17.9%, up 330 bps year over year.
FedEx Ground average daily package volume increased 5% and revenue per package grew 9%. FedEx SmartPost average daily volume expanded 29% and revenue per package grew 5%.
FedEx Freight revenue increased 6% year over year to $1.33 billion, reflecting 11% higher LTL (less-than-truckload) yield, partially offset by lower average daily LTL shipments (down 7%). FedEx Freight recorded an operating income of $42 million compared with an operating loss of $16 million in the year-ago quarter. Operating margin was 3.2% versus (1.3%) in the year-ago quarter.
Liquidity
FedEx exited the quarter with cash and cash equivalents of $1.9 billion compared with $1.7 billion in the year-ago quarter. Long-term debt reduced to $1.37 billion from $1.67 billion in the last quarter.
The company spent $1.1 billion in the first quarter, up 9.6% year over year.
Guidance
FedEx has projected earnings in the range of $1.40 to $1.60 per share for the second quarter of 2012. The mid-point ($1.50) is lower than the current Zacks Consensus Estimate of $1.59.
Based on rising fuel prices and moderate economic growth, FedEx has lowered its fiscal 2012 earnings projection from $6.35–$6.85 to $6.25–$6.75 per share. But the mid-point ($6.60) is still above the current Zacks Consensus Estimate of $6.42.
FedEx continues to expect capital spending of $4.2 billion for fiscal 2012. The company intends to buyback shares over the fiscal year under its existing repurchase authorization of 5.7 million shares.
Our Analysis
Despite economic volatility, we believe FedEx is poised to benefit from improved pricing, elevated volume, continued yield improvement and diminishing cost headwinds. This would lead to improved revenue, margins, earnings and cash flow in fiscal 2012.
However, increased investments, competitive threats from United Parcel Service Inc. (UPS), unionized workforce and steeper fuel prices may limit the upside potential of the stock.
We are currently maintaining our long-term Neutral rating on FedEx. The stock retains a Zacks #3 Rank (Hold) for the short term.
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