At least, that seems to be the opinion on Wall Street, which is bidding the world's premier package delivery service higher for the second straight day after Wednesday morning's "earnings miss." For the fiscal fourth quarter 2007, FedEx reported $1.96 per share in profits, or $0.02 short of Wall Street's consensus.
But enough about the quarter. Wednesday's news covered a whole year of progress at FedEx -- let's not waste the chance to discuss the whole of the (fiscal) year that was:
- Revenue for the year came in at $35.2 billion, up 9% from fiscal 2006.
- Operating margin was unchanged at 9.3%, yielding operating profit that likewise grew 9%.
- Meanwhile, on the bottom line, net profit rose 12%, and profit per diluted share was up 11%.
Free cash flow
Continuing to take the long view, FedEx provided guidance for the current fiscal year. Management predicts 8% to 14% better profit this year than last, with earnings falling somewhere between $7 and $7.40 per share. That's a bit slower growth than the firm's long-term target of 10% to 15% per year, and definitely short of the number analysts are predicting -- 15%. For that reason, although FedEx is currently doing very well, I see a cognitive dissonance building up on Wall Street that may threaten the shares going forward if FedEx merely meets its own expectations, and not Wall Street's.
Continuing our long-term theme, let's now turn to cash flow. Fools often eschew the venerable P/E metric on the theory that "E" stands for "easy manipulability of earnings." In its stead, we value a company on free cash flow -- but this poses its own problems. When a company invests heavily in growing its business, this can eat up so much free cash (in excess of that needed just to maintain the business) that it hides the firm's true cash profitability. In Wednesday's release, management gave us fair warning that this will be the case at FedEx in fiscal 2008.
After spending $2.9 billion on capital expenditures last year (a 14% increase over fiscal 2006), FedEx plans to accelerate its infrastructure spending yet again in fiscal 2008. Projecting $3.5 billion in capex, FedEx intends to grow capital spending 21%. Interestingly, unless rival UPS
Just something to keep in mind if you get to wondering why FedEx isn't throwing off nearly as much free cash flow as it reports in net profit.
What did we expect FedEx to deliver last quarter, and what did we discover when we unwrapped the package? Find out in:
- Relax, It's FedEx: Fool by Numbers
- Fool on Call: The FedEx Guarantee
- Before the Call: Fantastic FedEx
Fool contributor Rich Smith has no interest, short or long, in either company named above. FedEx is a Stock Advisor selection, while UPS is an Income Investor pick. You can check out either newsletter free for 30 days. The Motley Fool has a disclosure policy.