Here's why, in a nutshell:
- Revenues of $11 billion narrowly exceeded expectations
- Operating profit margins were up 30 basis points at 7.2% ...
- ... making earnings per share rise, too. Profits of $1.53 per share not only beat analyst estimates handily, but were up 5.5% from last year's Q1.
But despite this good news, there are at least a couple causes for worry in today's report.
For one thing, management still expects to increase capital spending by about 33% over fiscal 2013 levels, spending $4 billion on improvements this year. This spending promises to eat up much of the company's operating cash flow. At its present rate of cash production, in fact, it suggests FedEx could end this year with free cash flow of only $700 million or thereabouts -- less than half the company's amount of trailing GAAP "earnings."
Ixnay on the eatbay
Another cause for worry: Despite "beating estimates" in its first quarter of the year, FedEx declined to raise estimates for the rest of the year by an amount corresponding to the Q1 beat. Instead, management simply reaffirmed its prior guidance of 7% to 13% adjusted earnings growth for fiscal 2014.
By not taking the "extra" $0.03 earned in Q1, and adding them to what it previously thought it would earn in Qs 2 through 4 -- and consequently raising guidance -- FedEx is saying that it expects to earn less in Qs 2-4 now than it used to think it could earn.
The trouble with bellwethers
This should be cause for concern, not only for FedEx shareholders, but for all of us. One reason FedEx stood pat on its earnings guidance, rather than raising expectations, is that its management is growing more cautious on the pace of economic growth. Three months ago, FedEx told investors it was counting on the U.S. GDP to grow 2.3% in fiscal 2014, and the world to grow 2.7%.
Today, management's projecting rates of only 2.1%, and 2.6%, respectively. As expectations ratchet-downs go, it's not a huge cut ... but it is a cut. Adjust your own expectations accordingly.