FedEx (FDX)

LOS ANGELES, Dec 05, 2008 /PRNewswire via COMTEX/ -- Putting an end to a nearly decade-long, landmark legal battle, FedEx Ground/Home Delivery has agreed to a $27 million court judgment that includes payment of $14.5 million to 203 California drivers who were misclassified by the company as independent contractors. FedEx will also be paying $12.5 million in full attorney fees and most costs of the case that was the first to challenge the shipping giant's independent contractor practice. Final court approval of the stipulated judgment is expected soon.

FedEx reported weak Q4 results and provided full-year guidance that fell short of analysts’ estimates.

The package-shipper posted a loss of $0.78 per share, down from year-ago earnings of $1.96, on rising fuel costs, weak demand in domestic air express, and customer trade down in services. FedEx said that its Q4 fuel bill increased 54% to $1.39 billion and was an important factor in the loss. A previously announced write-down of $891 million related to the Kinko’s name change also contributed to weakness.

Revenue Increase

One bright spot was total revenue, which rose 7.8% to $9.87 billion. The company said that it has been unable to increase surcharges to match pace with fuel costs that have nearly doubled in the past year. The surcharges that FedEx has implemented have hurt demand for express shipments, as some customers downgrade to cheaper options such as two-day shipping or freight.

Projections

For the remainder of 2008, FedEx said profit will be $4.75-5.25 per share, compared to an average analyst estimate of $6.01. This implies a year-over-year decline of 10-19%, assuming stable fuel prices and no further weakening in the economy. FedEx is unique in that it is not only in the trucking business but also the airline sector, and so it faces an enormous challenge in delivering on revenue growth and cost containment.

FDX lowered its quarterly profit expectations last week, announcing that they expect to earn somewhere in the range of $1.45 to $1.60 per share this quarter (their fiscal fourth quarter), a reduction from the previously announced expectation of between $1.60 to $1.80 per share. The Company firmly blamed higher fuel costs for this reduction in EPS. Full year fiscal estimates for FDX were also reduced by many brokerage houses last week to a level of $5.80 (average) from a level of $5.90 the previous week. The next earnings date for FDX is coming on June 18, 2008.

Despite higher revenues expected in the 2009 fiscal year (analysts are projecting about 8% Y-O-Y growth in top line sales) analysts are now moving down their targets for 2009 EPS as well. At present, the average of the 18 analysts who follow FDX have a $6.20 EPS for the 2009 fiscal year, which while showing an increase over 2008's fiscal year results, does show that the company will continue to struggle for profit growth in an environment of rising fuel costs. Ninety days ago, the 2009 FY EPS estimates were over $7.10 per share. This is the canary in the coal mine, in our opinion, and the reason for our bearish outlook on FDX. Margins are going to be compressed in this industry, even if Fed Ex tries to pass on the costs to consumers with fuel surcharges. Competitive pressures in thin-margin industries usually lead to price wars, which are never good for any business's bottom line. though we are not predicting this outcome, we are predicting diminished levels of profit margins for FDX.

FedEx still depends primarily on the U.S. economy for revenue, and U.S. economic growth is expected to be moderate in coming years.

Under current law, a secret ballot must be held by a group of workers if they wish to unionize.^[1] Under the Employee Free Choice Act, if the majority of workers at any given location sign a card indicating their support of unionization, these workers are all instantly unionized.^[1] Under this new legislation supported by President Obama, FDX can expect to be infiltrated by Teamsters and experience significantly increased labor costs.^[1]

On December 8, 2008, FedEx took down its full year guidance for fiscal year 2009 (ending May 30) from $4.75-$5.25 to $3.50-$4.75 - a significant decrease.^[1] This earnings guidance cut suggests that we’re really just starting to descend into the teeth of the global recession as far as the real economy is concerned. Following the earnings forecast decrease, FedEx shares plummeted 16% on heavy volume, so here is one stock that has clearly not fully discounted the bad news.