FedEx Corp. (FDX) has curtailed its first quarter of fiscal 2013 outlook citing uncertain global economy. The company reduced its earnings estimates to the range of $1.37 to $1.43 per share from the previous expectation of $1.45 to $1.60 per diluted share.
The company cited issues regarding the current economic backdrop, which remain a constant headwind for revenue growth in its key segment, FedEx Express. FedEx foresees the global economic environment greatly affected by the European debt crisis, while slump in Asian economy will remain detrimental to its demand growth.
As a result, the company expects that demand would continue to drift from premium services to deferred services impacting margins negatively. The company also apprehends subdued revenue performance in U.S. domestic package in fiscal 2013 due to volume declines.
Hence, we remain cautious over Express margins improvement and do not foresee much of upside until demand rises in the international segment and costs improve in its domestic operations. Further, we expect contract expiry in the U.S. Postal Service (USPS) that includes FedEx's domestic air transportation services for USPS’ First-Class, Priority and Express Mail, which would impact Express revenue as it contributes approximately $1 billion to annual revenues.
Going forward, factors like pension expenses of approximately $150 million are expected to weigh on earnings for fiscal 2013. Depreciation expenses are also expected to increase due to shortened service life of some aircraft.
However, we believe if the global economy rebounds, FedEx will register strong earnings momentum and improvement in its long-term growth opportunities. We also foresee that earnings growth in fiscal 2013 will be aided by increasing profitability in the Freight segment coupled with continued growth in its Ground segment.
Additionally, improving international revenues and operational efficiency in FedEx Express will also support earnings going forward. We expect that these initiatives would substantially better the company’s earning power over the next several years.
Similar to its peers like United Parcel Service, Inc. (UPS), FedEx has been increasing its freight charges periodically. In early 2012, the company increased its general rate by 4.9% for FedEx Ground and FedEx Home Delivery shipments. It also raised shipping rates by 3.9% for FedEx Express covering U.S. domestic, U.S. export and import services.
Going forward, FedEx is boosting its international presence by heavy investment to enhance its existing routes and make strategic acquisitions. The company is also building a new hub in Guangzhou, China; with its new headquarters in Shanghai, for catering to 100 new Chinese cities within the next five years.
In terms of acquisitions, the company completed the take over of Polish courier company Opek Sp. z o.o. in June this year. In July, the company completed the acquisition of French B2B Express transportation company, TATEX that deals in domestic ground business and generates around €150 million in annual revenues.
FedEx’s latest buy includes the acquisition of Rapidão Cometa, a Brazilian transportation and logistics company with revenues of more than $500 million. The acquisition is expected to strengthen FedEx’s Express business in Latin America.
We believe the investments in organic growth as well as acquisitions will lead to greater operational efficiencies, providing a competitive edge, generating significant long-term synergies, supporting international business growth, and driving higher earnings, margins and returns over the long-term.
Currently, FedEx retains a Zacks #4 Rank (short-term Sell rating). We also reiterate our long-term Neutral recommendation on the stock.
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