FedEx Cost Cuts Take Spotlight

Look for some charges related to the job-reduction program, which will cost more money in the near term as the company pays out severance and benefits, but will save more money in the long run. On Oct. 2, the company announced that the program was ahead of schedule and would result in higher pretax charges in fiscal 2004, raising annual cost savings in fiscal 2005 to between $200 million and $230 million.

"As it turns out, acceptance rates for the programs were higher than the company had anticipated, so it will have to do some hiring as a result. ... We hope to hear an update from management on the second-quarter earnings call as to the implementation of these programs, notably if service was disrupted due to this," said Ritter.

When it comes to those critical operating margins, FedEx has been making steady progress. In the last quarter, operating margins at the express unit came in at 3.7%, up from 3.2% a year earlier, but overall, FedEx still lags UPS by a healthy margin.

"If [FedEx comes] close to those double-digit margins, you're going to have significant profit growth over next three years and make today's $70 stock price look cheap," said David Campbell, analyst at Thompson Davis.

But even with FedEx trading down 18 cents, or 0.2%, at $73.98 ahead of its earnings release, some analysts don't think the shipment company looks cheap when valued at more than 22 times 2004 projected earnings.

In a research note from Dec. 5, Fulcrum Global Partners analyst Jeffrey Kauffman, who rates the stock a sell, called FedEx's new focus on margins "a shift in the life cycle of the company," but not one that requires a higher valuation.

"The company is embarking on a new strategy to improve margins and cash flows, and has taken a new approach toward returns on the business. Appropriate? Yes, in our view. However, is this a reason to believe that EPS growth is better going forward? At this point in time, our answer is no," said Kauffman.

With the analyst camp is divided on FedEx's outlook and valuation -- nine rate it a buy, 14 rate it hold and one rates it a sell -- analysts will be closely examining the company's guidance to see how the job losses will affect earnings. Current Wall Street estimates call for earnings of 68 cents a share in the next quarter, with $3.30 a share for fiscal 2004.

(Goldman Sachs said it expects to receive compensation from FedEx for banking-related services in the next three months. All of the analysts cited in this article said that no part of their compensation was, is or will be directly or indirectly related to their investment opinion.)