FedEx Earnings To Show Impact Of Weak Global Economy
FedEx (NYSE:FDX) will announce the second quarter (September-November 2012) earning results for fiscal 2013 on December 19. The company anticipates a decline in earnings per share (EPS) for the quarter due to a weak global economy that has impacted the demand for its services particularly the higher-priced express services. Additionally, a pension contribution of $140 million during the quarter will impact its margins for the quarter. [1] However, cost reduction efforts through phasing out older airplanes and engines should provide some margin relief.
We currently have a stock price estimate of $93 for the company approximately 5% above its current market price.
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Weakness in global economy impacting demand for premium services
The slowdown in Europe due to the euro crisis, slowing growth in developing economies, and a weak economic environment in the U.S. has caused a shift in demand from FedEx’s higher-priced express services to its lower-priced ground services. This is impacting its top-line growth.
However, a few acquisitions made recently will partially offset this impact. In the first quarter of fiscal 2013, FedEx completed three major acquisitions: Opek Sp. z. o. o., a Polish domestic express package delivery company for $54 million; TATEX, a Frech express transportation company for $55 million; and Rapidao Cometa Logistica, a Brazilian transportation and logistics company for $398 million. [1]
Pension contributions will continue to impact margins
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 to $4.85 billion at the beginning of fiscal 2013 from $1.53 billion at the beginning of fiscal 2012. [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. The company anticipates to contribute $280 million more towards pension liabilities over the remainder of the fiscal. [1] These contributions will impact the company’s operating margins in the second quarter and remainder of its current fiscal year.
Cost reduction efforts will help margins
The company has also been adjusting its cost structures to bring them in line with the altered demand scenario. In June, it announced that it was retiring 24 older aircraft and 43 engines. These aircraft were to be replaced with Boeing 767-300 and 757-200 aircraft that are more fuel-efficient and have lower maintenance costs. In the first quarter of fiscal 2013, FedEx took the delivery of four Boeing 757 and two Boeing 777 aircraft. [1] These fleet adjustments will lower operating expenses for the company in the second quarter. However, these adjustments are not expected to fully compensate for the impact from lower demand for premium shipping services and pension contributions.
On the whole, in the second quarter, FedEx anticipates its EPS to fall in the range of $1.30-$1.45, down from $1.57 in the year ago period. [3]
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Notes:- Fiscal 2013 Q1 10-Q, www.fedex.com [↩] [↩] [↩] [↩]
- Fiscal 2012 10-K, July 16 2012, investors.fedex.com [↩]
- FedEx Corp. Reports First Quarter Results, September 18 2012, www.fedex.com [↩]