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January 01, 2011 at 07:00 PM
Thomas R. Wadewitz
J.P. Morgan
212-622-6461
[email protected]
We believe that Federal Express’ (FDX) medium-term story remains attractive with volume growth in International and Ground and margin expansion in Express and Freight (LTL) as key drivers of EPS growth. A gradual acceleration in domestic small package pricing also provides support for our positive medium term view.
Recent momentum in consumer activity (strong November retail sales) provides a positive indication for peak season results for both FDX and UPS.
We expect an in-line earnings report from Federal Express … when they report their 2QF11 results. The demand data we track for FDX’s Express business indicate that volumes in the quarter are likely to be in line with our forecasts while the move up in fuel is probably a modest headwind.
FDX stock has performed well since the late August low in the market (FDX is up 22% vs. S&P 500 17% since Aug. 31). We believe FDX’s medium-term story is on track, but there is probably near-term risk related to 3Q guidance.
We believe that FDX’s 2QF11 EPS is likely to be broadly in line with expectations (Consensus is $1.32 and our forecast is $1.30). Transport demand data in 2Q show that FDX’s Express volumes have likely been on track and the rise in fuel prices in 2Q is probably only a headwind of $0.04/share or less.
Airfreight data indicate FDX Express volumes are likely consistent with our 2Q forecast.
Gary Chase
Barclays Capital
212-526-5752
[email protected]
We believe the market will take the fuel revisions in stride and focus on the longer-term potential [of FedEx] where we believe growth of international Express and Ground should lead to both rising earnings and higher returns for shareholders.
Stepping back from near-term earnings, we believe the bigger story for FDX is the potential for the company to expand both margins and returns across the cycle. In a slide deck we published recently (“FedEx Can Deliver on Returns”), we highlight our analysis on the potential for near $9 in EPS and increased returns from International & Ground expansion.
