Wednesday, June 30, 1999
DJIA 10767.22 -48.13 (-0.45%) S&P 500 1341.49 -9.96 (-0.74%) Nasdaq 2628.81 -13.30 (-0.50%) Russell 2000 454.74 +0.66 (+0.15%) 30-Year Bond 88 8/32 -20/32 6.11 Yield

An Investment Opinion
by Warren Gump

FDX Delivers Earnings Gains

Shipping and logistics company FDX Corp. (NYSE: FDX), the parent of both FedEx and RPS, continued delivering earnings gains during its fiscal fourth quarter, which ended in May. Earnings per share (EPS) increased 28% to $0.73, two cents ahead of analysts' consensus estimate. Revenue increased 7% to $4.4 billion. For the year, excluding nonrecurring charges in both periods, earnings increased 24% to $2.28 per share on a 6% revenue gain. Although virtually every key statistic looked positive, the stock dropped $1 1/16 to $53 7/16 on the news, as people (a few analysts and the talking heads on CNBC, among others) had been mentioning since Monday that the company was likely to beat estimates.

We could spend a day or two talking about the fun of the earnings estimates gains, but that wouldn't really prove too fruitful of an endeavor for long-term investors. These things move prices for a couple of days, enlarging the heads of our Wall Street friends who have provided such memorable sound bites as, "Well, I'm estimating $0.71 cents, but I really think they'll come in a couple of pennies ahead of that." And the reason your estimate isn't $0.73 is�? (The answer, mumbled in hushed tones to favored clients: "I don't want my estimate to be too high, frustrating the company's management, which wants to beat Street estimates, thus hurting my chances of providing profitable investment banking services to the company.") Fortunately for us, stock prices over longer periods of time tend to respond more to underlying company performance than Wall Street spin.

Speaking of underlying fundamentals, things are looking quite good. The company experienced both volume growth and yield increases (average prices per units) across all of its product lines. Domestic overnight shipments, which account for 63% of FedEx volume, were up 3%-4% for the quarter with slight increases in yields. International Priority shipments jumped up almost 10%, also with a slight increase in yield. Revenue at the RPS unit, which represented 11% of quarterly revenue and 18% of operating profits, surged 15% as volume and yield each increased roughly 6%. A strong economy and successful management efforts to maintain a strong position in business-to-business shipping have facilitated these gains.

Although unit and revenue growth was pretty strong for an established company as FDX, earnings growth was even higher, primarily due to reduced fuel prices. Total operating expenses at the FedEx unit grew 5.6% compared to 6.5% revenue growth. Excluding fuel costs, however, the company saw FedEx operating expenses rise 6.4%, just about in line with the revenue gain. Although I haven't been able to find information in public filings, the company reportedly entered into some favorable hedging contracts that helped lower fuel costs. I don't know how much longer those will be in effect.

FDX is looking quite healthy these days. The company has increased efforts to target business that is profitable. In addition, it has the tailwind of a strong U.S. economy, a recovering international economy, and an emerging Internet economy that will increasingly need shipping and logistics services. As management continues to reliably plop growing earnings on investor's doorsteps, the company's value should continue increasing.


Property and casualty insurer Gainsco Inc. (NYSE: GNA) gained $1 3/16 to $5 3/8 after investment firm Goff Moore Strategic Partners L.P. agreed to take a 23% stake in the company for $31.6 million in exchange for the right to manage the company's investment portfolios. Additionally, the company said its Q2 earnings will "be in the range" of the $0.09 per share Gainsco said analysts are currently expecting.

Online mortgage company E-Loan Inc. (Nasdaq: EELN) picked up another $3 11/16 to $40 11/16 after rising 164% yesterday following its initial public offering of 3.5 million shares at a price of $14 per share. Other IPO high-flyers from yesterday also continued to rise. Internet banking services company nFront (Nasdaq: NFNT) moved up $3 to $16 1/2 and online company-targeted network services firm Digital Island (Nasdaq: ISLD) added $5 15/16 to $17 13/16.

Wireless communications tower rental company Pinnacle Holdings (Nasdaq: BIGT) climbed $4 5/16 to $23 151/6 after agreeing to acquire Motorola's (NYSE: MOT) North American antenna site business, including 1,850 wireless facilities, for $255 million.

E-mail and advanced messaging services firm Mail.com (Nasdaq: MAIL) delivered a $6 7/16 gain to $19 3/8 after saying 14 regional Internet service providers (ISP) in the Eastern and Midwestern portions of the U.S. have signed on to use the company's Web-based e-mail service.

Discount broker National Discount Brokers (NYSE: NDB) traded up $9 1/2 to $54 3/4 after U.S. Bancorp Piper Jaffray started coverage of the company with a "strong buy" rating and a 12-month price target of $90 per share.

Global satellite phone and paging company Iridium World Communications (Nasdaq: IRID) was launched $1 5/16 to $11 1/4 after securing a waiver from its creditors relating to the minimum customer and revenue covenants of an $800 million credit facility. The waiver is good through August 11 but could end earlier if Iridium can scrape enough cash together to make scheduled interest payments to holders of its junk bonds.

Covad Communications (Nasdaq: COVD) rose $4 1/8 to $45 1/2 after Morgan Stanley Dean Witter started coverage of the digital subscriber line (DSL) services provider with an "outperform" rating and a price target of $60 per share.

Logistics services company Circle International Group (Nasdaq: CRCL) tacked on $2 1/2 to $22 1/8 following a Deutsche Banc Alex. Brown upgrade to "strong buy" from buy."


Office imaging equipment supplier Danka Business Systems PLC (Nasdaq: DANKY) was knocked down $2 3/8 to $4 7/8 after saying private investment group Schroder Ventures called off its planned purchase of Danka's outsourcing division after IBM (NYSE: IBM) notified the company that it may terminate an existing agreement with the division "at any time." That was enough to scare away the buyer, voiding a related bank waiver by the firm's creditors in the process and leaving Danka searching for a new way to refinance the company.

Telecommunications firm MCI WorldCom (Nasdaq: WCOM) slumped $5 5/8 to $88 after PaineWebber reportedly said the company's Q2 earnings will be no more than $0.45 per share due to lower-than-expected revenues from its voice business. Still, that's within the $0.39 to $0.46 per share range expected by the 24 analysts surveyed by Zacks.

Athletic shoe retailer The Finish Line (Nasdaq: FINL) tripped $1 1/16 to $10 15/16 after posting fiscal Q1 EPS of $0.15, down from last year's $0.22 but a penny ahead of the Zacks mean estimate. Gross profit margins fell to 28% during the period from 30% due to higher occupancy costs (which the company includes in cost of sales), and net same store sales fell 5% from their levels a year ago.

Specialty floral and gift retailer Gerald Stevens (Nasdaq: GIFT) wilted $1 1/16 to $12 after a 5 million share common stock offering by the company was priced at $12 per share, or 8% below the firm's closing price of $13 1/16 per share yesterday.

Online advertising agency Modem Media.Poppe Tyson (Nasdaq: MMPT) dropped $2 5/8 to $22 9/16 after saying it has ended its relationship with AT&T Corp. (NYSE: T) because "our philosophies and strategies are not aligned." However, the company said it remains "confident with our ability to meet current analyst consensus estimates for 1999," which happen to call for a loss of $0.21 per share.

Mesaba Airlines parent Mesaba Holdings (Nasdaq: MAIR) descended $1 5/16 to $12 13/16 after President and CEO Bryan Bedford resigned. Current Vice President John Frederickson has been appointed interim CEO.

Commercial and mortgage lender Webster Financial Corp. (Nasdaq: WBST) slipped $1 7/8 to $26 1/2 after agreeing to acquire bank holding company and Connecticut neighbor New England Community Bancorp (Nasdaq: NECB) for about $220 million in stock.


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