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FedEx Shares Slip on Dour Forecast

Updated from 9:47 a.m. EDT

FedEx (FDX - Get Report) beat estimates for its fiscal third quarter, but operating margin fell as higher fuel prices and a weak domestic economy limited demand for express delivery, trucking, and copy and print services.

At the same time, the overnight package delivery giant said current quarter earnings would not meet estimates. On a conference call with analysts, CEO Fred Smith said FedEx anticipates the slowdown will continue. "In calendar year 2008, we expect U.S. GDP to grow more slowly than in 2007," he said.

For the quarter ended Feb. 29, earnings were $393 million, or $1.26 a share. Analysts surveyed by Thomson Financial had estimated $1.22. A year earlier, the company earned $1.25 a share, including a one-time benefit of 8 cents.

Revenue rose 10% to $9.44 billion, exceeding estimates of $9.1 billion. The company's operating margin was 6.8%, down from 7.5% a year ago. Operating income was unchanged, and average daily package volume grew 5%.

For the current quarter, analysts had expected earnings of $1.95 a share, but the company on Thursday said it expects $1.60 to $1.80 a share. "I don't have as much confidence in this range as I normally do due to oil price volatility," said CFO Alan Graf. "It could cause us to miss this range on either side. This outlook assumes no additional impact to the current price environment and no additional weakness in the economy."

FedEx earned $1.96 a share, or $1.90 after a one-time gain, in the same period of the prior year.

While the domestic economy is slowing, Smith noted that the international economy should expand overall, albeit at a lower rate, and will be led by emerging markets.

"The wild card going forward remains the price of fuel," he said. "Based on my calculations, this is probably the largest transfer of wealth in the history of the world, with $2.5 trillion since the price of oil began to run up in 2002" moving from oil consumers to oil producers. The world economy will adjust, as it did in 1973, 1979 and 1990, he said.

During the quarter, in every business segment, revenue rose, while margins fell. FedEx Ground and FedEx Express had volume increases, but FedEx Freight showed a 3% decrease, with a December dropoff followed by growth in January and February. Improved revenue also reflected higher fuel surcharges.

FedEx Express revenue was $6.13 billion, up 11%, but operating margin was 6.9%, down from 7.2%. FedEx Ground had revenue of $1.72 billion, an increase of 13%, while the operating margin was 9.9%, down from 12.9%. FedEx Freight had revenue of $1.16 billion, up 5%, but operating margin was 4%, down from 4.5%.

As for FedEx Kinko's, the company will slow expansion in fiscal 2009 due to the weak outlook, opening 70 new locations, down from 300 in fiscal 2008.

FedEx shares were trading down 5 cents at $86.18. Shares of rival UPS (UPS - Get Report) were adding 80 cents at $71.44.

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