Hey, Mr. Market? I noticed that you've bid up FedEx (NYSE: FDX ) shares by 6% since it released earnings on Thursday, and I've got a question for you: Did you read the same news I did?
Sure, there was good news in the report. Daily package volumes in the FedEx Express and FedEx Ground segments were up about 5% on average in the fiscal third quarter 2008, and overall revenues increased 10% year over year to $9.44 billion.
But the bad news more than outweighed the good. A weakening U.S. economy depressed demand for U.S. domestic express, less-than-truckload deliveries, and copy and print services at FedEx's Kinko's subsidiary. Combined with soaring fuel costs, this dropped operating margins 70 basis points to 6.8%, wiping out any possibility of improved profit on the additional revenues. Result: Q3 profits dropped 7% to $1.26 per share, and free cash flow has been basically nonexistent.
CEO Fred Smith blamed "persistently high oil prices, sluggish U.S. growth and continued concerns in the credit markets" for the quarter's poor performance. And CFO Alan Graf added that: "Looking ahead to our fiscal 2009, we are expecting a continuation of fourth quarter trends." Summing up the forecast, the two execs agreed that Q4 earnings could easily drop 8% to 18% year over year, to $1.60 to $1.80 per share. What's more, this is the best-case scenario, and assumes "no additional increases to current fuel prices and no further weakening in the economy." In other words, if fuel costs rise (think $4-a-gallon gas) or the economy weakens, next quarter's numbers could look even worse.
And the uglier
Not scared yet? Consider that up on Wall Street, analysts turned a deaf ear to FedEx's dire projections. "Professional" investors are still hoping to see FedEx turn in $1.81 per share this quarter -- more than the best that management is hoping for.
Now, you may look at FedEx's forward P/E ratio, and think that at 13.5 times next year's expected earnings, the stock looks cheap next to 13.3% projected growth (especially with UPS (NYSE: UPS ) priced 10% higher). But knowing that Wall Street is ignoring the risk of a downside, you might want to think again.
Keep track of FedEx's recent earnings news in: