FedEx Delivers Mediocre Results

Earnings are lower than expected, but economy may be coming back, FedEx says

by Ben Steverman

FedEx (FDX) had some encouraging words for the world economy Wednesday despite mediocre earnings results.

The international shipping firm, extremely sensitive to economic ups and downs, reported earnings of $1.90 per share on Monday, excluding 6 cents per share from a one-time item.

Many of the results looked good. FedEx earned $1.82 per share a year ago. Revenue was up 8% from a year ago. Operating income was up 9% and net income was up 7%. The operating profit margin was 11.1%, up from 10.9% a year ago.

Still, many analysts were expecting more, with the average estimate at $1.95 per share.

Frederick W. Smith, FedEx chairman, president and chief executive, said in a statement growth was "restrained by a slowing U.S. economy." A weakened industrial sector is limiting demand for transportation, he says.

But here's the good news: "We expect the U.S. economy to begin to show modest year-over-year improvement in the late summer to early fall timeframe," Smith said in his statement. "We remain optimistic about prospects for global economic growth."

To take advantage of global growth, FedEx is spending big to expand its shipping networks. That could cut into profit growth, the firm says. Capital spending for fiscal 2008 will be $3.5 billion.

On Monday FedEx offered estimates for fiscal 2008 earnings that were lower than many analysts were expecting. It guided for fiscal 2008 earnings of $7 to $7.40 per share, and warned it may not meet its long-term goal of 10 to 15% earnings growth.

But J.P. Morgan analyst Thomas Wadewitz said the new forecasts were a good sign for the stock. A lot of bad news was already reflected in FedEx's stock price, he wrote in a report. The new guidance "removes a potential risk to the stock," by easing worries that earnings could be flat or actually fall.

Those watching FedEx should keep a close eye on the U.S. economy. FedEx "does remain an economically sensitive story," Wadewitz wrote. "The most likely catalyst for a trend up in the stock would be data points which show renewed growth in the U.S. economy."

Steverman is a reporter for BusinessWeek's Investing channel.