FedEx Earnings To Show Weak Global Economic Environment

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FedEx (NYSE:FDX) is scheduled to announce the first quarter (June-August 2012) earnings report of its fiscal year 2013 on Tuesday, September 18th. The company in a recent announcement cut its earnings per share (EPS) guidance range for the quarter to $1.37 – $1.43, from the earlier indicated $1.45 – $1.60. [1] Its EPS for the corresponding period last year was $1.46. This decline in the anticipated first quarter EPS points to the effect of the European sovereign debt crises, slowing growth in the Asia-Pacific region and weak economic environment in the U.S. on the demand for FedEx’s services. In addition, the company faces increased pressure on its net income on account of higher pension contributions, which have increased as a result of historically low interest rates.

On the bright side, FedEx’s bottom line for the quarter will benefit from the phasing out of 24 old airplanes earlier this year and their replacement with more fuel-efficient jets.

All in all, the company will negotiate a tough first quarter in earnings on Tuesday.

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See our complete analysis for FedEx here

Weak global economic environment to impact demand for premium services

The slowdown in Europe on account of the euro crisis, slowing growth in the emerging economies of China and India, and a weak economic environment in the U.S. has caused a shift in demand from FedEx’s high margin express services to its low margin deferred services and sea-borne shipping. As a result, we anticipate the package volume transported by FedEx Express segment to continue to decline in the first quarter, partially offset by higher revenue per package for the segment; and package volume for the FedEx Ground segment to continue to increase.

Higher pension contributions to impact net income

In addition, the historically low interest rates have lowered returns on pension plan assets of the company. The under funded portion of pension costs stood at $4.85 billion on May 31st 2012, up from $1.53 billion a year ago. [2] The company made cash contributions of $780 million in the fiscal year 2012 and expects this number to go up by $150 million for the current fiscal year. Thus, increased cash contributions to under funded pension plans shall impact net income for the company in the first quarter and the rest of fiscal year 2013.

On the bright side, the company shall benefit from a planned $100 million decline in capital expenditure, as it has delayed the delivery of two B777F aircraft from the current fiscal. Also, the retirement of 24 older aircraft and related engines earlier this year shall help drive up operational efficiency during the quarter, and improve the bottom line.

On the whole, we anticipate a tough quarter for FedEx in earnings on Tuesday, and going forward, in light of the current uncertain global economic environment, the company will have to reduce costs, improve efficiencies and adjust its supply network to manage anticipated demand.

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Notes:
  1. FedEx Corp. Updates First Quarter Earnings Outlook, September 4 2012, investors.fedex.com []
  2. 2012, 10-K, July 16 2012, investors.fedex.com []