Weak Global Economy Hurts FedEx’s Profit And Outlook
FedEx (NYSE:FDX) announced a 12% year-over-year drop in profits for the quarter ended November 30. [1] Earnings slumped due to a shift in demand towards lower-yielding international services and pension contributions, partially offset by savings achieved through cost-cutting measures. Superstorm Sandy also impacted the second quarter earnings. On the bright side, e-commerce continued to drive growth in the FedEx Ground segment.
Going forward, the company anticipates lower y-o-y earnings in the second half of its fiscal 2013 due to a weak global economy that will continue to impact demand for its premium level high-yielding services. FedEx’s business is tied to the health of the U.S. economy and if business slows next year due to the fiscal cliff or for other reasons, this will weigh on growth. Further, the company is actively pursuing its $1.7 billion annual profitability improvement program through cost reductions to help cushion the business for the expected shift.
We currently have a stock price estimate of $92.57 for the company, nearly in-line with its current market price.
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Acquisitions and e-commerce
Revenues for FedEx increased 5% y-o-y to $11.1 billion in the second quarter. [1] This growth in revenues was primarily from acquisitions which were completed earlier in the fiscal year. The continued strong performance in the Ground and Freight segments of the company also helped revenues.
FedEx completed three major acquisitions in the first quarter: Opek Sp. z. o. o., a Polish domestic express package delivery company for $54 million; TATEX, a French express transportation company for $55 million; and Rapidao Cometa Logistica, a Brazilian transportation and logistics company for $398 million. [2]
Further, in the FedEx Ground segment, revenues increased due to growth in both volume and revenue per package. Volume increased in both business-to-business and business-to-home delivery segments driven by e-commerce while revenue per package increased due to higher shipping rates. In the FedEx Freight segment, the company continued to benefit from its dual offering of priority and economy shipping.
Weak global economy and super storm Sandy
However, weak economic growth worldwide forced many customers to trade speed for economy. As a result, FedEx shipped more on the ground and less through air. This shift in demand towards lower-priced, low-yielding services impacted the company’s operating income in the second quarter. Earnings declined to $1.39 per diluted share in the second quarter from $1.57 per diluted share in the year-ago period. This decline includes a $0.11 per diluted share impact from Super Storm Sandy which reduced shipment volumes and also increased operating costs in the quarter. [1]
Pension contributions
Further, the historically low interest rates have lowered returns on pension plan assets for the company. The underfunded portion of pension liabilities for FedEx increased from $1.53 billion at the beginning of fiscal 2012 to $4.85 billion at the beginning of fiscal 2013. [2] As a result, it had to contribute $140 million in the first quarter of fiscal 2013 and made another payment of $140 million in September 2012 towards pension liabilities. This contribution towards underfunded pension liabilities impacted margins for the second quarter. The company anticipates contributing $280 million more towards pension liabilities over the remainder of the fiscal. [3]
Outlook
Going forward FedEx anticipates slow global economic growth to continue to impact its earnings. The company anticipates earnings in the range of $1.25 to $1.45 per diluted share in the third quarter, down 12% to 24% on a year-over-year basis. For full fiscal 2013, it anticipates earnings in the range of $4.91 to $5.51, down 14% to 24% on a year-over-year basis. However, this includes a $1.09 to $1.29 per diluted share impact from the voluntary employee buyout program which FedEx will incur in the fourth quarter. [1] This one-time charge is part of FedEx’s cost reduction plan through which it aims to improve its profits by $1.7 billion annually by fiscal 2016.
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Notes:- FedEx Corp. Reports Second Quarter Earnings, December 19 2012, www.fedex [↩] [↩] [↩] [↩]
- Fiscal 2012 10-K, July 16 2012, investors.fedex.com [↩] [↩]
- Fiscal 2013 Q1 10-Q, www.fedex.com [↩]