Quarterly earnings for
are likely to take a backseat to comments about profit margins and layoffs when the company posts its first-quarter results on Wednesday.
Analysts expect the world's largest express-delivery company to earn 57 cents a share on revenue of $5.791 billion, according to Thomson First Call. The company, which is in the process of restructuring, expects earnings of 52 cents to 60 cents a share.
"We believe that investors should not overreact to these possible results, as we believe they were expected, and the real value in the FedEx name is in the future margin expansion throughout the fiscal year, not the difficult first quarter," said Daniel Hemme, analyst with Prudential Financial, in a research note Monday. FedEx shares, which have jumped 40% in the past year, fell 24 cents, or 0.4%, to $65 Monday afternoon in reaction to the note.
While earnings seem unlikely to miss forecasts, some analysts warn that revenue expectations could be a bit too optimistic, especially when it comes to ground operations. Because ground operations helped carry FedEx in fiscal 2003 amid a threatened labor strike at rival
, some investors could be in for a disappointment if they expect this trend to continue indefinitely.
"Estimates for ground revenue significantly exceed our 4% growth projections, resulting in unreal expectations on the top line," said Hemme. "There is concern that investors may focus more on the top-line growth prospects of ground ... regardless of bottom-line results. The real value of the stock lies in the margin expansion expected over the next three to six quarters."
Investors who have bought FedEx shares, especially those who have bought them near the company's 52-week high of $68.96 set on Aug. 22, will be focused on the company's growth margins, especially in its lucrative express shipping unit.
FedEx management announced on June 24 that it hopes to achieve operating margins of 10% in the express business, which would greatly increase profits from current levels. But with year-ago operating margins on the business coming in at 3.3%, FedEx has a lot of work to do, which is why cost cuts and layoffs are key.
"We hope to hear more details about management's plan to post double-digit margins at Express during the first-quarter conference call," said Jennifer Cooke Ritter, an analyst at Lehman Brothers, in a research note last week. "If FedEx posts double-digit margins at Express quicker than we are projecting, we could be low on our long-term earnings estimates. To date, management has provided little detail about when the company will achieve this long-term goal."
Lehman expects the company to reach operating margins of 8% by 2008, which highlights the fact that investors who are buying company shares at these levels, not far from analyst price targets and a 52-week high, should be in for the long haul. At 20 times expected 2004 earnings, FedEx is getting pricey, with limited upside until the company can prove its restructuring is a success.
"While we have not changed our outlook on the fundamentals of the company, we would wait for a pullback on the current stock price to be heavy buyers," said Ritter. "Regardless of whether the first quarter is stellar or not, it is management's view of the recovery impacting their business going forward that will move the stock on that day."
Indeed, when it comes to FedEx's quarter, analysts advise investors to take a long view of the company's results, especially because the company is unlikely to release a clean earnings figure or give clear forward-looking guidance about the second quarter. Analysts say a combination of accounting issues and complications related to headcount-reduction efforts will muddy Wednesday's results and leave guidance somewhat cloudy.
"FedEx's reported first-quarter results and second-quarter guidance are likely to be messy because of a one-time tax gain of 8 cents a share and a charge for employees that elected to take FedEx's early retirement or voluntary severance program prior to Aug. 31," said James Valentine, analyst at Morgan Stanley, in a note last week.
Because enrollment in the employee-reduction program overlaps two quarters, it will be impossible to get a complete picture of the program's progress. As a result, investors should look for further management comments on the program, since greater cost reductions now will prove beneficial next year at this time. "FedEx will likely report a charge in each quarter, while most benefits won't appear until the second half of 2004," said Valentine.