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Pension Costs Dull FedEx Outlook

Disappointing FedEx projections are contributing to a market decline.
Author:

MEMPHIS (

TheStreet

) -- As

FedEx's

(FDX) - Get Report

disappointing guidance led the market down early Wednesday, CFO Alan Graf said the numbers primarily reflect higher pension fund payments necessitated by low interest rates.

Moreover, during the company's earnings conference call, Graf asked, "What's wrong with a 20% to 25% improvement in EPS for the coming year?"

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Before the opening Wednesday, FedEx reported earnings of $1.33 a share for the fiscal fourth quarter ending May 31, beating estimates by a penny and nearly doubling its earnings for the same quarter a year earlier. The company also projected earnings of 85 cents to $1.05 a share in the current quarter and $4.40 to $5 for fiscal year 2011. Analysts surveyed by Thomson Reuters were estimating $1.03 for the current quarter and $5.05 for fiscal 2011. In fiscal year 2010, FedEx earned $3.76 a share excluding items.

Before the opening, FedEx's stock price was down between $1 and $2. The decline gathered steam, so that about an hour after the opening, shares were trading down $2.21 to $80.83.

On the call, Graf said the company faces some cost headwinds, primarily a fixed pension cost increase of $260 million due to the decline in the discount rate. "I doubt any of you had that much of an increase in projections," Graf told analysts. He said he is lobbying for change in the requirement that pension fund levels be maintained at "mark to market" levels based on the discount rate.

"This is the lowest rate we'll ever see," Graf said. "That was a big factor in why our range may be a little bit lower than where First Call is."

Additionally, FedEx faces increased maintenance costs on aircraft which are returning to service as the economy expands. Dave Bronczek, CEO of FedEx Express, said six were returned in the fourth quarter and more will be coming in the first two quarters of fiscal 2011, as the company grows capacity to meet demand.

In general, FedEx is positive about future growth. "We expect stronger demand for our services and continued growth in revenue and earnings," said CEO Fred Smith. "The improving economy will result in a more stable pricing environment, enhancing our ability to improve yields."

Smith said that many industrial companies have fallen behind in their efforts to maintain inventories, heightening their need for premium FedEx services.

-- Written by Ted Reed in Charlotte, N.C.