FedEx Delivers Drab Outlook

Although the package-shipper saw earnings rise, it sees long-term weakness in business ahead.
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Updated from 10:30 a.m. EST

FedEx

(FDX) - Get Report

said net income rose 3% in its fiscal second quarter but offered an exceedingly glum near-term outlook.

"We frankly expect the difficult economic environment will worsen in the second half of 2009," said CFO Alan Graf, on a conference call. "Weaker economic conditions in the U.S. have spread to Europe and Asia, (and) we don't believe we have reached the bottom of industrial production or consumer spending at this point.

"We do not anticipate GDP growth to turn positive until the fourth calendar quarter of 2009 at the earliest," Graf said. One of the most negative signs, he noted, was sequential worsening during the quarter. "In December and going into the second half, we just see a lot of weakness," he said.

The package-shipping giant said earnings in the fiscal second quarter ending Nov. 30 were $493 million or $1.58 a share, in line with estimates. Revenue rose 1% to $9.54 billion; analysts surveyed by Thomson Reuters had estimated $9.58 billion.

Much of the improvement was due to lower fuel prices. Total combined average daily package volume in the FedEx Express and FedEx Ground segments fell by 2%, and operating income was flat.

FedEx shares closed down $1.37, or 2.14%, to $62.60, after being up as high as $65.40 earlier in the day. Shares in competitor

UPS

(UPS) - Get Report

closed higher 32 cents to $52.78, but had been higher earlier in the session. UPS reported in October that its third-quarter net income fell nearly 10% as U.S. package volume slowed, particularly toward the end of the quarter. Thomson Financial estimates UPS' fourth-quarter earnings at 89 cents a share, a decline from $1.07 in 2007.

The company announced cost-cutting moves to reduce expenses by $200 million in fiscal 2009, on top of $1 billion worth of cuts already made. The new reductions add $600 million in 2010 cuts. They include salary decreases for most employees ranging from 5% up to 20% for CEO Fred Smith, elimination of merit-based salary increases and suspension of 401(k) matching contributions for a minimum of one year, effective Feb. 1, 2009.

Last week, Fed Ex affirmed earnings estimates of $3.50 to $4.75 a share for the fiscal year. The company declined to provide third-quarter guidance. Although FedEx is benefitting from competitor

DHL's

exit from the domestic market and from lower fuel prices, Graf said visibility is limited and he cannot quantify the benefit or offer more specific guidance.

"Tell me how many packages went through the Wilmington hub at DHL last night (and) I can give you a better idea," he said. "Tell me how weak or strong industrial production will be in the first quarter '09 and that would help. Our best guess is what would be an economy that quits declining so rapidly."

On the bright side, Graf noted: "We think that when it turns back, up, it will be pretty dang rapid. There's no inventory out there (and) supply chains are extremely short right now."