Avondale Partners LLC
We don’t know when spring starts (neither does the company), but when it does FedEx will be well positioned to take full advantage of each of the marketplaces it competes in. Current company guidance expects a long cold winter (weak global economy) and stable fuel prices. Any material improvement in global trade demand or the failure of yet another competitor will lead to significant upside opportunities for FedEx.
Overall we estimate that FedEx earnings saw an $0.80 per share benefit from the timing of fuel surcharge collection relative to the expense. Again, this only starts to catch-up for the earlier shortfall but goes a long way toward explaining the company’s reluctance to issue guidance. Guidance now stands at $3.50 to $4.75 share for fiscal 2009.
We would also be remiss if we didn’t point out that despite the lousy economic conditions they continue to steal market share, continue to be cash flow positive (if only barely), and continue to be profitable (in an environment in which competitors are hemorrhaging cash and even going out of business entirely [some U.S. operations of DHL]). This supports our “best in class” competitor thesis.
David Ross, CFA
FedEx reported F2Q09 EPS in line with preannouncement at $1.58.
We are leaving our FY09-FY11 EPS estimates unchanged at $4.05, $4.63, and $6.05, respectively, but are adjusting our expected volume growth rates and margin assumptions to account for FedEx’s proactive cost reduction initiatives, most recent quarter’s results, and the uncertain freight outlook.
Recently implemented cost reduction initiatives helped mitigate negative margin impact from lower volumes; more cost-saving plans were laid out for F2H09. To sum up the cost initiatives, there was $1 billion in cost actions taken prior to the announcement in FY09. With the announcement of new initiatives, the company plans to save an additional $200 million in payroll and salary cuts this year in F2Q09 (which will become a $600 million benefit in total next year). Therefore, $1.6 billion of annual cost savings is expected for FY10 vs. FY08. Furthermore, and not surprisingly, the company cut its capital expenditure plans for FY09 from $3.0 billion to $2.4 billion due to the slowing business environment.
We are maintaining our Buy rating, as the company remains in good financial position and a large competitor [DHL] is exiting the U.S. market.
FedEx reports F2Q in-line with its pre-report. Revenue, EBIT and EPS grew 1 percent, 0 percent and 3 percent driven by an estimated roughly $0.50 y/y EPS fuel benefit vs. a 23 percent EPS decline in F1Q including a $0.18 tailwind from fuel.
It’s still tough to judge the impact from DHL’s impending exit in the U.S. On the call, management noted that Ground’s Home Delivery and Smartpost results benefited from the discontinuation of DHL’s @Home product while this benefit is only beginning to be observed at Express.
FedEx announces further cost-side initiatives. Management announced new cost initiatives including across the board pay cuts and suspension of 401(k) matching that is expected to reduce expenses by $200 million and $600 million in F09 and F10, in addition to further outlining its prior measures to reduce expenses by $1 billion, more inline with lower volumes in F09. It also further reduced Capex guidance by 4 percent (now reduced 20 percent YTD).
We retain our Out Perform rating While global freight demand continues to weaken with another step down anticipated in F3Q, FDX still should see some tailwind from lower fuel, increasing volume from DHL, and some gradual expense-side improvement, giving us increased confidence that we should be close to a bottom for expectations.