Foolish Forecast: FedEx Follies

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Earnings reports. The concept seems almost quaint in an investing world gone mad. Yet earnings season is once again upon us, and fearless freighter FedEx (NYSE: FDX) delivers the news from its fiscal second quarter of 2009 on Thursday morning. Here's what you need to know to make sense of it.

What analysts say:

• Buy, sell, or waffle? 17 analysts ride herd on FedEx, giving the stock five buy ratings and a dozen holds.
• Revenues. They're looking for a bare 4.5% in sales growth, to $9.87 billion.
• Earnings. Profits are expected to inch up 2% to $1.57 per share.

What management says:
Judging from the reaction to the piece, and the comments submitted by you, my favorite readers, I'm guessing you already know all about "what management says." Earlier this month, FedEx 'fessed up and told us that with oil prices finally falling, this quarter looks great. But things are going to get a whole lot iffier down the road. Since fiscal 2009 earnings guidance got slashed 18%, we're looking for somewhere between $3.50 and $4.75 per share for the year.

What management does:
High energy prices have done a number on FedEx's margins lo these past 18 months, and while a letup on the pressure at the gas pump may yield better margins tomorrow, they still have a deep hole to dig out of if they're to return to the profit margins of yesteryear.

Margins	5/07	8/07	11/07	2/08	5/08	8/08
Operating	9.3%	9.2%	8.9%	8.7%	7.8%	7.2%
Net	5.7%	5.7%	5.5%	5.3%	3%	2.6%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Now, I know what you're thinking: Why wouldn't FedEx's raising of rates reverse this dismal descent? After all, UPS (NYSE: UPS) saw FedEx raising rates and thought it a move worth imitating. And didn't FedEx tell us that it's raising rates to "enhance the customer experience, gain market share, reduce expenses, [and] improve profits" -- emphasis on the "improve profits" bit?

Short answer: Yes, it did say that. Longer answer: Raising rates rarely enhances anyone's customer experience. Ask any of the eBay (Nasdaq: EBAY) sellers who have ever gotten an earful over the price they charge for shipping & handling -- or ask them how they feel about eBay raising listing or selling fees for that matter. By raising rates, FedEx and UPS will in fact decrease demand for their services among the legions of small businessmen who patronize them.

By FedEx's own admission: "demand for our services weakened sequentially throughout the quarter and global economic trends continue to worsen" -- news that bodes ill for larger businesses that rely on the two publically traded majors for shipping. Reviewing FedEx and UPS customer lists reveals names like PetMed Express (Nasdaq: PETS), PC Mall (Nasdaq: MALL), Cabela's (NYSE: CAB), and Zumiez (Nasdaq: ZUMZ). If FedEx is forecasting waning demand for shipping from a depressed holiday season, then they aren't doing themselves any favors by raising rates. In fact, FedEx and UPS seem dead-set on depressing demand further.

That said, by raising their rates in lockstep, the two oligarchs of publicly-traded shipping may at least accomplish one thing: Neither one should "gain share" in this shrinking market at the other's expense.

What did we expect from FedEx last time around, and what was in the box once opened? Find out in:

• FedEx Pulls a Fast One
• Foolish Forecast: FedEx Will Straighten Up, Fly Right