FedEx Earnings Look Shipshape - TheStreet

Updated from 8:22 a.m. EST


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reported strong earnings growth and beat Wall Street expectations in the third quarter, citing strength across its shipping businesses.

The company said, however, that earnings growth in the current quarter is unlikely to be so strong, because of tougher year-over-year comparisons. It also cautioned that rising fuel costs may crimp margins.

FedEx Thursday said net income was $317 million, or $1.03 a share, in its third quarter, which ended Feb. 28. That was up 53% from $207 million, or 68 cents a share, a year earlier. It also topped the average Wall Street estimate of 98 cents from Thomson First Call.

Revenue was $7.34 billion, up 21% from $6.06 billion a year before and better than the $7.19 billion Wall Street forecast.

Despite FedEx's better-than-expected quarter, the company's shares were down 65 cents, or 0.7%, at $96.28.

FedEx's results contrast with those of rival


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, which had a weaker-than-expected fourth quarter on a slowdown in ground deliveries.

"We have solid momentum in the business and customer demand is strong," said Frederick W. Smith, FedEx's CEO. "Economic conditions remain favorable, and we are optimistic about future growth prospects. We are executing our plans very well and our unique business strategy is paying off."

The company's quarter was bolstered by strong revenue and margin improvement in FedEx Express, its largest business segment. Express revenue was $4.92 billion, up 12% from last year's $4.37 billion, while margins increased to 6.9% from 5.0%. The unit's international priority business saw continued strong growth, with revenue rising 19% and average daily package volume up 11%. But even the more-mature U.S. domestic express business had robust results, with revenue growing 9% on a 6% increase in average daily package volume.

FedEx's ground business also posted strong performance, with revenue increasing 25% year over year to $1.20 billion and operating margins rising to 12.4% from 11.6%. Average daily package volume grew 16, while yields improved 4%.

Meanwhile, its freight business had revenue of $747 million, up 19% from last year's $630 million, while operating margins rose to 7.2% from 5.9%.

Results were not as bright at Kinko's, which FedEx absorbed last spring. Kinko's revenue was $499 million, and the operating margin was 2.2%. FedEx did not provide year-over-year comparisons, but said Kinko's business levels declined sequentially from the fiscal second quarter because of the slower winter months. The unit's operating margin also was adversely impacted by integration activities.

FedEx now expects EPS of $1.40 to $1.50 in its fiscal fourth quarter, which ends May 31. The analyst estimate from Thomson First Call is $1.49, at the top end of the company's range.

FedEx warned that if the recent trend of higher fuel costs continues, fourth-quarter margins could suffer. In a conference call, executives noted that the company's fuel surcharges lag changes in oil prices by about four to six weeks and said the fourth-quarter guidance already accounted for higher fuel.

Crude oil is showing no signs of stopping its recent rally, with the April futures contract surging above $57 a barrel Thursday after having surpassed last October's record high on Wednesday.