Earning Plays

[3xBuBu]

FedEx 2Q Profit Falls on Fuel Costs
Thursday December 20, 5:26 pm ET
By Woody Baird, Associated Press Writer
Fuel Costs Push Down FedEx 2Q Profit 6 Pct, Outlook for 3Q Below Wall Street Forecasts

MEMPHIS, Tenn. (AP) -- FedEx Corp. predicts profits will still be back on track for the year, though high fuel prices and a sluggish U.S. economy dropped second quarter net profits by 6 percent on Thursday.
The prediction for the fiscal year included some "ifs," however, and the package courier offered earnings forecasts for the current quarter below Wall Street estimates.

For the second quarter, ending Nov. 30, the pain of the U.S. economic slowdown was tempered by the an ongoing expansion abroad that is expected to pay Fedex large dividends for years.

"The domestic economy is hurting in a number of ways and some of those ways are hitting FedEx pretty hard," said Edward Jones analyst Dan Ortwerth. "(But) they're still expanding their business globally, getting real traction, and they're still taking market share in the home delivery business here in the United States."

FedEx earned $479 million, or $1.54 a share, in the second quarter, compared with $511 million, or $1.64 a share, for the same period last year.

The company's shares fell 94 cents to $93.69 in afternoon trading Thursday.

FedEx met its expectations for the quarter after lowering them last month -- because of rising fuel prices and a slow domestic economy -- to a range of $1.45 to $1.55, down from an earlier estimate of $1.60 to $1.75.

Analysts surveyed by Thomson Financial predicted quarterly earnings of $1.50 per share on their own lowered expectations.

Revenue for the period rose 6 percent to $9.45 billion from $8.93 billion last year. Analysts were expecting revenues of $9.32 billion.

For the third quarter, FedEx said it expects to earn $1.15 to $1.30 per share, compared with $1.35 per share a year ago. Analysts polled by Thomson Financial expect a profit of $1.37 per share.

Expecting a strong fourth quarter and vowing aggressive cost controls, FedEx reaffirmed its outlook for the year, predicting earnings of $6.40 to $6.70 per share.

That outlook "does assume relative stability and fuel prices and no additional weakening in the economy," said Alan Graf, FedEx chief financial officer.

But Credit Suisse analyst Jason Seidl, predicting annual earnings of $6.30 a share, said the company's assumptions were optimistic.

"We have uncertain economic conditions. We have rising fuel costs, and we have increasing costs defending their contractor model," Seidl said, referring to a legal fight between FedEx Ground, the company's trucking division, and its contract drivers.

Frederick W. Smith, FedEx chairman and chief executive, said the company is well positioned to continue taking advantage of "macro-economic trends" driving a "global trading system."

"You now have, in the form of the Internet, a very low-cost standardized visual medium where people can sell and source goods without regard to time or place," Smith said in a conference call with analysts.

The outlook for the U.S. economy remains poor, but "we don't think that the United States is going to see an economic meltdown," he said. "We don't think there is going to be strong growth in the U.S. economy and that's what our forecast is built around."

FedEx also said it has lowered its capital spending projections, previously put at $3.5 billion, by about 11 percent.

"It's across the board," Graf said, "with the exception of what we need to do at Ground in terms of continuing to expand our facilities to handle the unbelievable volume growth that they have."

FedEx Freight, the company's freight unit, reported a 6 percent decline in less-than-truckload shipments in the second quarter. The unit also reported an operating income of $79 million, a drop of 43 percent from last year.

The demand for freight shipping is "severely restrained" by the weak economy, "and we expect this weakness to continue into our third fiscal quarter," Graf said.

The internal fight with FedEx Ground drivers also cut into the division's operating income, FedEx said.

FedEx Ground is defending itself against challenges from contract drivers around the country who argue they should be company employees with full employee benefits. FedEx is also reorganizing its ground system in California, where single-route drivers are switching to multiple routes.

While vague on its expectations from that fight, the company noted it faces "increased regulatory and legal uncertainty."

"This is a threat they've been facing for years and they've known it," said Edward Jones' Ortwerth. "I would be shocked if they did not have contingency plans in place to preserve the profitability of the business. Sure, it's a problem. Otherwise they wouldn't fight it."
http://biz.yahoo.com/ap/071220/earns_fedex.html?.v=11