FedEx posts higher-than expected profit, will cut more capacity

FedEx reining in costs, including retiring older, less efficient airplanes and raising shipping rates

PUBLISHED : Thursday, 20 June, 2013, 10:26am
UPDATED : Thursday, 20 June, 2013, 10:26am

FedEx reported a higher-than-expected quarterly profit on Wednesday as it cut costs and its US truck business continued to pick up steam.

Shares were up 2.3 per cent to US$101.80 Wednesday afternoon on the New York Stock Exchange while the broader S&P 500 was trading down 0.13 per cent.

The company, considered an economic bellwether because of the massive volume of goods it moves around the world, is cutting costs and jobs to adjust to higher demand for less expensive international shipping.

In addition to cutting jobs, FedEx is taking steps to rein in costs, including retiring older, less efficient airplanes and raising shipping rates.

The company’s express unit, its biggest source of revenue, has suffered as more cost-conscious international customers opt to substitute costly overnight air shipments with cheaper shipping.

FedEx had said earlier that the express unit had underperformed largely due to weakness in Asia and other international markets, where margin pressure caused by excess capacity in the air freight industry had more than offset increased volumes.

Companies like Apple and Samsung have seen demand for their smartphones soften in recent months, and many analysts have cut back on their shipment forecasts accordingly.

“I would assume about 40 per cent of FedEx’s international priority shipments out of China are tech and telecoms,” said Peter Nesvold, analyst with Jefferies & Co. “What happens in that segment does matter for this company.”

International priority shipment volumes fell 2 per cent during the quarter, while international export revenue per package fell 2 per cent as rates dropped.

In contrast, bigger rival United Parcel Service, the world’s No. 1 package delivery company, said in April that its international package business will drive results in the near term and that it expects the small-package market to grow faster than the US economy this year.

Adjusted operating margins for the company’s ground transport segment were 20.1 per cent, almost triple that of its express segment. Morningstar analyst Keith Schoonmaker said the company could consider expanding that business to Canada and Mexico to boost earnings. He also said the company’s forecast of a 7 per cent to 13 per cent increase in full-year earnings, excluding special items, was conservative.

Schoonmaker said that though the earnings outlook could be seen as conservative, the numbers for the quarter did not change FedEx’s standing among rivals. “We still think the shares are a buy,” he said.

The company said earlier this month that it would permanently retire or will speed up the retirement of 86 aircraft and more than 300 engines as it modernizes its fleet. It is also increasing rates for its FedEx Freight subsidiary by an average of 4.5 per cent, effective July 1.

“Our profit improvement program is progressing, but we continue to see the effects of customers selecting lower-rate international services,” chief financial officer Alan Graf Jr. said. “FedEx Express will further decrease capacity between Asia and the United States in July.”

FedEx reported net income of US$303 million, or 95 cents a share, for the fourth quarter ended May 31, compared with US$550 million, or US$1.73 a share, a year earlier.

Excluding costs of a business realignment program and aircraft impairment charges, the company earned US$2.13 a share. Analysts on average were expecting US$1.96, according to Thomson Reuters I/B/E/S.

Revenue rose 3.6 per cent to US$11.4 billion, with FedEx Express revenue up 3 per cent at US$6.98 billion.

Revenue for the ground segment was US$2.78 billion, up 12 per cent. FedEx Ground’s average daily volume grew 10 per cent in the quarter, helped by market share gains and growth in e-commerce.

For its new fiscal year FedEx forecast earnings growth of 7 per cent to 13 per cent, excluding special items, assuming US gross domestic product growth of 2.3 per cent, world GDP growth of 2.7 per cent and the current outlook for fuel prices.

Analysts on average were expecting a profit of US$7.31 a share, which would be about 11 per cent higher than last year. They termed the outlook conservative.

“FedEx’s full-year guidance is readily achievable and creates a lower hurdle rate for success if the economy were to improve at a faster-than-expected rate,” Duetsche Bank analyst Justin Yagerman wrote in a note.

Oppenheimer analyst Scott Schneeberger said he expected earnings growth to accelerate in fiscal 2015 and 2016.