FedEx issues bullish Q4 outlook

FedEx Corp. yesterday released fiscal third-quarter results that were in line with expectations and issued a bullish outlook for its current quarter, a welcome tonic for global markets worried about issues ranging from the threat of nuclear catastrophe in Japan to elevated oil prices sparked by unrest in the Middle East and North Africa.

The Memphis-based giant reported revenue of $9.66 billion, up 11 percent from the same period a year ago. Operating and net income declined by 6 percent and 3 percent, respectively, reflecting the impact of higher fuel prices and of severe winter storms that reduced volumes and drove up costs, the company said. The company has levied higher fuel surcharges to offset the higher costs, but it often takes two to three months for the impact of the surcharges to be felt in the results.

FedEx also said it absorbed higher costs arising from the Jan. 30 integration of its two less-than-truckload (LTL) units and the reinstatement of merit pay increases as well as higher pension costs, among other expenses.

FedEx issued fiscal fourth-quarter earnings per share guidance of $1.66 to $1.83 per share, compared with analysts' consensus of $1.66 per share. Analysts say the projection is impressive given the lag time of the company's fuel surcharge mechanisms. FedEx's fiscal year ends on May 31.

Bullish on global trade
Company executives were optimistic about global trade and shipping trends, while staying cautious about fuel prices and geopolitical unrest. The projected strength in its fiscal fourth-quarter results is largely dependent on a more well-behaved oil market, they said.

Executives were also upbeat on the outlook for rates, saying it is just at the start of a multi-year trend in firmer pricing for its products and services.

"Continued growth in the global economy is driving solid revenue gains in our transportation businesses," said Frederick W. Smith, FedEx's chairman, president and CEO, in a statement. "We expect strong demand for our services to boost our financial performance in our fourth quarter."

In a subsequent conference call with analysts, Smith said the "dynamics of global trade appear solid, although the impact of volatile fuel prices and other global events remains uncertain."

Both FedEx and its chief rival, UPS Inc., are considered proxies for the U.S. and global economies due to their size and scope, as well as the symbiotic relationship between manufacturing and shipping. In a research note, Jon A. Langenfeld, transport analyst for Robert W. Baird & Co. said the nation's industrial sector is showing strong growth, trends reflected in accelerated demand for LTL and flatbed services, among others. Langenfeld also said gains are especially pronounced in the U.S. Midwest.

Positive yield trends
For FedEx, the story of its third quarter appears to be strong yield management. At the newly reconstituted FedEx Freight, for example, yields rose 11 percent while shipments fell by 6 percent, reflecting the impact of bad weather and rate increases, but also the company's decision to cull unprofitable or less-profitable freight from its network.

"Successful yield management initiatives helped drive significant revenue growth across our transportation segments in the third quarter, although results were dampened by severe winter storms and higher-than-expected fuel costs," said Alan B. Graf Jr., FedEx Corp.'s executive vice president and chief financial officer, in a statement.

Graf noted that the company's FedEx Ground parcel unit posted record results in the third quarter. He added that FedEx Freight should return to profitability in the current quarter. The unit posted a $110 million third-quarter operating loss.

"More broadly, we expect continued positive yield trends to improve revenues and margins in the fourth quarter and in fiscal 2012," Graf said.