FedEx 2Q profit up, share price falters

FedEx Corp.'s second-quarter profit gain of 9 percent was overshadowed Wednesday by the outlook for the third quarter.

After reporting a strong second quarter that exceeded analyst expectations, the company said it expected lower third-quarter earnings than last year, largely due to a sluggish U.S. economy and fuel bills.

The package shipper's third-quarter forecast was below Wall Street predictions. Shares tumbled almost 2 percent, down $2.15, to close at $111.85 on the New York Stock Exchange.

"We believe FedEx is beginning to see the impact of a slowing economy and as such, management is tempering expectations for the second half of the year," analyst Art Hatfield said in a report for Morgan Keegan. Hatfield did not change his ratings or estimates, however.

Donald Broughton of A.G. Edwards said the company's success in international markets can offset domestic slowdowns.

"They said themselves that the domestic economy is showing signs of weakness," Broughton said. "FedEx's international business continues to grow and in a down-volume domestic environment, they produced the best operating margins they've ever produced."

While predicting lower third-quarter earnings than for the same period year, FedEx is looking for a stronger than expected fourth period.

"That's an adjustment of timing," Broughton said. "That's not a meaningful adjustment of outlook."

In a conference call with analysts, FedEx founder and chief executive Frederick W. Smith said FedEx expects "steady performance" for the fiscal year ending May 31 largely because of a "healthy global economy led by continued strong growth in Asia."

But Smith also acknowledged he expects a "somewhat slower growth in the U.S. economy related to adjustments in housing and manufacturing sectors."

During the same call, chief financial officer Allen B. Graf reacted to an Internet headline that characterized the earnings report as disappointing.

"I want to remind everybody on this call that we have the same outlook for the year that we had last quarter, so be careful about the talking heads," Graf said. "We have the same outlook. We're going to have a strong year."

FedEx said it expects adjusted full-year profits to range between $6.60 to $6.90 per share. The company said in September that it expected adjusted earnings of $6.50 to $6.85 per share.

FedEx forecast profit of $1.20 to $1.35 per share for the third quarter, down from $1.38 per share in last year's third quarter, and between $1.98 and $2.13 per share in the fourth quarter.

Analysts expect a profit in the fiscal year of $6.82 per share, third-quarter earnings of $1.55 per share and fourth-quarter earnings of $1.98 per share.

FedEx said earnings for the second quarter, which ended Nov. 30, increased to $511 million, or $1.64 per share. That is up from $471 million, or $1.53 per share, during the corresponding period last year.

The results included costs associated with a new labor contract for FedEx pilots which cut earnings by about 25 cents per share. Excluding those costs, the company said it earned $1.89 a share for the second quarter.

Analysts polled by Thomson Financial predicted a profit for the quarter of $1.76 a share. That estimate excludes 20 cents a share in costs for one-time bonuses and other compensation included in the pilots' contract.

FedEx revenue was up 10 percent to $8.93 billion from $8.09 billion. Analysts expected revenue of $8.91 billion.

Graf said second-quarter earnings were helped by lower-than-expected fuel costs.

Third-quarter earnings last year were boosted by a lag in adjusting fuel surcharges that reflected a spike in jet fuel prices, and that makes income projections for the upcoming financial period difficult, Graf said. Fuel surcharges are passed along to customers.

"Last year's third quarter benefited from the timing lag in setting the surcharge and this year the opposite is going to occur," Graf said.

Ken Hoexter of Merrill Lynch said such lags are common, with the overall balance of fuel costs and surcharges smoothing out in the long run.

"It's not about making a profit. It's literally the timing of when you pay the fuel bill versus the timing of when you run your surcharge through," he said. "It's not making money on the surcharge or losing money on it."