News and Commentary: Federal Express Frank about Fiscal 2000

Federal Express Frank about Fiscal 2000

By Richard McCaffery (TMF Gibson)
September 16, 1999

Worldwide package delivery company Federal Express (NYSE: FDX) reported earnings of $0.52 per share for its fiscal first quarter, up a mere $0.02 from the same period last year and two cents shy of First Call mean estimates.

The Memphis, Tennessee company that absolutely, positively delivers more than three million packages a day to 211 countries warned higher fuel prices are cutting into operating margins. Additionally, domestic package volume at Federal Express and its RPS subsidiary grew just 3% and 4%, respectively, in the last quarter.

Fuel prices alone could take more than a $150 million bite out of operating income in fiscal 2000, company officials said. If lower domestic growth continues, earnings for Q2 and fiscal 2000 could fall below analyst estimates of $2.44 per share.

Sounds dire. Sounds like analysts will have to adjust forecasts, maybe cut near term ratings and issue reports. Sounds like Federal Express shareholders are in for serious turbulence.

It also sounds like a classic opportunity for investors to think long term about a company that's guided shareholders through plenty of foul weather since 1973. A bit of perspective: Last year, Federal Express said the global transportation market is expected to grow from $75 billion in 1998 to almost $400 billion in the next 20 years. With revenue of $16 billion in 1998, Federal Express had a 21.3% share of that market. If it maintains its marketshare -- which won't be easy but is certainly possible -- Federal Express would have revenue of $85.2 billion by the time the market reaches $400 billion.

With that kind of marketshare up for grabs, investors should think twice before panicking about a few slow quarters. Besides, what Federal Express investor doesn't know fuel prices are volatile, or that rising prices will make some quarters messy?

At the same time, slower-than-expected growth in the company's domestic package volume is definitely worth tracking. It's always good to see how management responds to crisis. The company says it's developing stringent cost controls and productivity enhancement programs to offset the problems. What has it accomplished to give investors confidence it can ride out the storm?

It has grown its income more than tenfold since 1993. In 1999, it increased operating income 15%. Net income and earnings per share grew 26%. In 1998 and 1999, it generated a good deal more cash from operations than it consumed in investing activities, which is impressive for a company that has to maintain a fleet of aircraft. It also cut its long-term debt-to-equity ratio to 29% in 1999 from 35% in 1998. On top of all this, management is committed to growing earnings 12% to 15% annually and achieving return on equity of at least 20%.

Investors should always watch the quarterly action, but let the pilots fly.

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