the Fedex 4Q11 earnings report: blue skies ahead

the results

FDX reported quarterly results for its 4Q11 (the FDX fiscal year ends in May) before the start of trading in New York yesterday.  The company posted earnings per share of $1.75, up 31.5% year on year, on revenues of $10.6 billion, a 12% gain vs. sales in the fourth quarter a year ago.  The numbers, which Wall Street typically forecasts with a very high degree of accuracy, exceeded analysts’ eps estimates by $.04.

eye-popping earnings guidance for fiscal 2012

In the same earnings release, FDX gave its initial earnings guidance for 1Q12, as well as for fiscal 2012 as a whole.  For the full fiscal year, the company expects to earn $6.35-$6.85 per share;  for 1Q12 it thinks it will have income of $1.40-$1.60. Taking the midpoint of both ranges, that would imply profit growth for the full year of about 35%, and for the first quarter of about 25%.

These are eye-popping numbers.  They reflect:

–the strength of FDX management,

–the company’s high gearing to world trade, which responds in a high-beta way to world economic growth, and

–FDX’s significant exposure to international markets, which the company thinks will approach half of total revenue, and represent the majority of the firm’s profits, this year, for the first time in its history.

the stock

Let’s say the earnings guidance signals that FDX really thinks $7 a share is within reach for the fiscal 2012.  That would imply that the stock is now trading at around 13x forward earnings, or a slight premium to the market.

I’ve owned FDX on occasion over the years.  My overall take is that the management is excellent, but that the stock is so widely followed and respected that it seldom trades at a bargain price.  My first instinct is that the shares do look cheap today.  But glancing at the issue’s multiple relative to the market during the past decade, this is about where FDX normally trades.  So I’m sitting on my hands for the moment.

the FDX economic outlook

Transport and logistics companies are interesting in themselves.  But there’s also a second reason they’re so widely watched.  Because they have such intimate knowledge of the production plans of their customers, they have an unusually good understanding about how the economy is faring in the areas where they operate.  With its long experience, and its position as the premier global air transport firm, FDX has a particularly advantaged view.

Here’s what it’s expecting over the coming twelve months:

–“moderate” economic growth, with the rest of the world doing better than the US,

–acceleration of growth as the year progresses.  Why?

ο  FDX thinks that 40% of the current “soft patch” is due to the the negative effects of the earthquake/tsunamis in Fukushima during March.  The company can already see activity picking up, however.

ο  Higher oil prices caused another 40% of the slowdown, in FDX’s view.  The oil price has been falling for two months, however, in large part because consumers have reacted by using less.  FDX expects oil to stay at today’s level or lower–exhibiting the same behavior it has in similar circumstances in the past.

ο  The remaining 20% is negative sentiment, based on the previous two factors.  FDX expects sentiment will gradually recover as consumers see supply-chain recovery in Japan and lower petroleum prices.

my comments

Two things strike me about the FDX report.  First, the company’s economic forecast sounds very much like the one Fed Chairman Bernanke outlined yesterday.  Second, even a so-so economic environment is enough to allow well-managed companies to make very large profit gains–implying good stockpicking will be well-rewarded in the current environment.




FedEx’s first fiscal 2011 quarter (ended August 31st): stronger global growth

the FDX report

Last Thursday FDX reported strong first quarter fiscal 2011 results.  Earnings per share were $1.02 for the three months, up 108% from the $.58 tallied in the comparable three months of fiscal 2010.

FedEx also announced plans to address the loss-making freight segment by merging FedEx Freight with FedEx National LTL (less than truckload) commercial shipping operations into one unit next January.  Despite terminal closings and layoffs, FDX expects to gain market share–and profits–with the move.

FDX upped full-year earnings per share guidance from the previous range of $4.60 – $5.20 to $4.65 – $5.25, ex merger related expenses of $150-$200 million.

By line of business, operating earnings for the quarter were as follows:

FedEx Express     $357 million vs. $104 million in the year-ago quarter

FedEx Ground     $287 million vs. $209 million

FedEx Freight     -$16 million vs. $2 million.

FedEx as bellwether

Transport has a high-beta relationship with overall economic growth.  FDX’s strong earnings performance is a good indicator that economies, around the world but especially in Asia, are continuing to expand.

Express, primarily an international business, saw international package volume rise by 19% and weight by 41%, producing revenue growth of 20%, year over year.  Small, high value packages from Asia (like cellphones or iPads) are a particular strength.  So much so that FedEx has added two scheduled daily flights from Asia over the past few months, bringing the FDX total to 12.  The company will soon boost capacity again as it replaces older airplanes with new purchases.  FDX’s planes are booked through the year-end holiday season.  Load factors are the highest they’ve been in ten years.  Customers are upgrading to premium service.

Revenues for Ground, a US-centric business, were up 13% on a 7% increase in package volume.   The volume boost comes almost completely from market share gains.  In FDX’s view, the US economy is showing “slow but sustained” growth.  The shape of the recovery is “normal.”

The US LTL industry suffers from chronic overcapacity.  Too many trucks chasing too few goods–plus contracts signed when things looked bleakest last year–are the two reasons for FDX’s poor showing in its domestic Freight business.  The company thinks it sees a remedy by using advanced software to more or less replicate the structure of its international air business on the ground at home.   Hence the merger of Freight and National LTL.

The ongoing recovery of world economies is being led by the industrial sector, and by China, India, Mexico and Brazil.  From the remarks FDX management made in its conference call, it seems to me that FDX thinks the securities analysts who follow it–and by extension, American investors generally–just don’t “get” how big these countries are.  Presumably, the international business will be a major topic of the firm’s annual analyst day in Memphis in a couple of weeks.  The main idea will likely be that the developing world is growing like a weed.  In 1980, the developed world made up two-thirds of the global economy and was twice the size of the developing nations.  Within two or three years, however, the developing world will make up over 50% of global output, more than the developed countries’ GDP.

FDX as a stock

I know what the issues are but I don’t know FDX well enough to have an opinion.

1.  At present, manufacturers are controlling the distribution of products by keeping inventories centralized and shipping them at the last minute by air.  The other alternative would be to put the output on boats and truck them to their final destination from the destination port.  The former means higher transport costs but creates extra flexibility for firms to avoid sending products to places where inventories are already high and sales are unexpectedly slow.

The current situation plays to FDX’s strengths and is a financial bonanza for it.  The company strongly believes customers are not reacting to worries about an uncertain world, but are rather taking advantage of supply chain management software advances that save them money through more precise inventory control.

Sounds reasonable to be, but I don’t know.  Not good for FDX if manufacturers go back to using boats.

2.  The domestic freight business has low barriers to entry.  FDX is trying to create one by introducing advanced software to control its commercial truck freight shipments in the same way it does internationally with air.  Its marketing research says customers want the pricing flexibility the new system will provide–and that therefore FDX will be able to make more (or at least some) money with less invested capital.

I’m big on “work smarter, not harder,” so again this sounds good.  But we still have to see.

3.  Fiscal 2011 is a transition year, filled with all sorts of one-time costs.  There are:

–maintenance for previously mothballed planes now being put back in service

–capital expenditure for new planes to service booming international package demand

–higher personnel costs from health care plus restoration of salary and benefits cut during the recession

–writeoff of merger costs, estimated at $150-$200 million.

This kind of stuff happens every once in a while.  It seems to be bothering analysts, but I don’t think it’s such a big deal–especially if #1 and #2 end up doing what FDX thinks.

If both #1 and #2 pan out, FDX looks to me like a very cheap stock.