Thursday, December 17, 2009

FedEx beats earnings, but forward guidance leaves investors unimpressed (FDX)

FedEx (FDX) shares are off 5.5% this morning.  They beat earnings guidance for the second quarter of their fiscal year, but their outlook is "muddled" to say the least.

While leaving full year guidance intact (or even with some upside) of 3.45-3.75 per share, they're guiding Q3 to 60cents, well below the street estimate at 84cents.   That means they're making pretty optimistic assumptions about a robust recovery in the quarter ending May, if they're to hit that earnings number.

Investors aren't buying it, and that's why the shares are off.  With shares up 136% off their March lows, some selling is certainly in order.  Even with today's stock drop, the shares still trade at a none-too cheap 18times earnings, and Free Cash Flow Yield (FCFY%) is 4% on this year's estimate and 5% on 2011 estimates.  Not a bargain.

If there's something positive to take away from the FedEx earnings report, it's that volume data appears to be improving.  The lower than expected earnings is not coming from a further reduction in demand, but rather higher maintenance spending and salary increases.

From the release:

Our balance sheet is strong, volumes are growing, and we are encouraged by our performance as we emerge from the worst economic downturn in FedEx history,” said Alan B. Graf Jr., FedEx Corp. executive vice president and chief financial officer. “While there is some uncertainty regarding the sustainability of current demand trends after our peak shipping season, we expect our strong operating leverage to provide improved year-over-year profitability in the second half of our fiscal year. Effective cost management remains a priority and should continue to benefit results.”
With an outlook for modestly improving economic conditions and business performance, FedEx will resume merit salary increases for calendar 2010 as well as a 50% resumption of the 401(k) company match for most U.S. employees. These programs were suspended a year ago. In addition, second quarter results reflect expenses to accrue for expected payouts under the company’s variable incentive compensation programs, which are designed to pay base incentives to most hourly, professional and manager-level employees prior to paying any amounts to senior management. These expected costs are included in the company’s earnings guidance."

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