Eric Gillin
FedEx(FDX Quote - Cramer on FDX - Stock Picks) will release its second-quarter earnings report on Wednesday, but results will likely take a back seat to news on the company's cost-cutting efforts.
By and large, analysts know what to expect from FedEx, which has said earnings per share will come in between 80 cents and 90 cents for the second quarter. Analyst estimates are the high end of FedEx's range, with the average estimate at 90 cents, up from the 81-cent profit posted a year ago, according to Thomson First Call. Revenue is also expected to grow from the year-ago quarter, with analysts forecasting $5.9 billion, on average, up 4.1% from last year's $5.667 billion, according to First Call. But analysts also say there could be more upside, as cost-conscious retailers use just-in-time inventory management to make operations more efficient. "As more and more businesses move to just-in-time inventory, UPS (UPS Quote - Cramer on UPS - Stock Picks) and FedEx's services will be more and more in demand," said Jennifer Cooke Ritter, an analyst at Lehman Brothers, noting that inventories fell by $14 billion in the third quarter. "This most recent decline increases our confidence that many inventories were not well stocked at the end of the third quarter ... it could mean positive surprises for UPS and FedEx this quarter." Indeed, in the previous quarter, FedEx topped Wall Street estimates by 4 cents a share on better-than-expected shipments. Once again, analysts will be focused on the company's bread-and-butter Express business, but even more so on its international Express business, which is a growing part of the business mix. Though small, accounting for just 19% of FedEx's revenue in 2003, the international business could see growth between 8% and 14% going forward, Goldman Sachs estimates. "We estimate double-digit revenue growth on the international front, consistent with trends reported over the last four quarters, particularly given a modest improvement in the computer and semiconductor markets," said Joanna Shatney, analyst at Goldman Sachs, in a research note. Meanwhile, FedEx's plan to cut costs and restructure in order to boost margins could draw the most attention from analysts. On June 24, the company announced a plan to achieve operating margins of 10% in the express business and launched a voluntary program to reduce jobs. Because most of the job attrition will take place in the first and second quarters of 2004, Wednesday's earnings release will include charges and information about the cost savings from that plan. As with the previous quarter, when charges related to the staffing reductions were taken, investors will see two different EPS figures, one according to generally accepted accounting principles and the other pro-forma, which is comparable to analyst estimates.
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