FedEx Credits Strong Ground Business for Improved Earnings

Updated from 8:46 a.m. EST

FedEx ( FDX) said earnings in the third quarter would meet or slightly beat the current expectations, largely as a result of the market share the company's ground business has gained.

The shipping company said earnings would be "at the top or slightly in excess" of a range of 25 cents to 35 cents a share. FedEx also still expects fourth-quarter earnings of 70 cents to 80 cents a share. Shares of FedEx were lately up $1.43, or 2.7%, to $54.83. This year, the stock has climbed 5.7%. Airborne ( ABF) and UPS ( UPS), the chief competitors of FedEx, were also trading higher.

"Strong revenue and profit growth at FedEx Ground and continued focus on costs at FedEx Express will improve our profitability this quarter," Alan Graf, the chief executive of FedEx, said in a statement.

The company said ground package volume growth should approach 20% in the third quarter ending Feb. 28, above forecasts for a 16% gain. FedEx's ground service, launched in March 2000 as part of a plan to become a one-stop shop, accounted for 13% of the company's total revenue in the second quarter.

While the ground operation is growing, the company's air division, FedEx Express, which brought in 75% of revenue in the second quarter, has continued to suffer from the downturn in the economy. FedEx didn't adjust its volume outlook for FedEx Express, which it expects to be 5% below last year's levels.

Despite the company's guidance, experts warned against drawing too many conclusions about a turnaround in the economy. "I wouldn't extrapolate from a modest improvement in FedEx's ground business that the economy is doing better," said Stephen Jacobs, an analyst at U.S. Bancorp Piper Jaffray.

Still, shipping is considered a proxy for demand in the economy. A couple of recent reports combined with the FedEx news could provide some cause for optimism. The Institute for Supply Management's index for supplier deliveries -- a measure of the speed at which packages are delivered -- slowed in January for the first time in 10 months.

"If deliveries are taking a longer time, it means that more of them are being made," said Tony Crescenzi, bond market strategist at Miller Tabak. "This data may support the FedEx news."

Separately, shipments of durable goods were up 0.5% in December, according to the Census Bureau's latest monthly report. "It may mean inventories are so low that restocking is under way," said Crescenzi. "We're all looking for signs of a turnaround, wherever they may come."

In 2002, commercial and industrial loans, which correlate with inventory investment, are up. But analysts who follow FedEx say the company still has a while to wait before it can truly benefit from an economic recovery.

"We're still dragging along the bottom," said Vincent Kim, an analyst at Merrill Lynch. "But by the second half of the year, you'll see a better performance related to the economy."

More from Earnings

Jim Cramer Reveals the Recipe for a Higher Stock Price

Jim Cramer Reveals the Recipe for a Higher Stock Price

Jim Cramer: Should We Abandon Quarterly Guidance?

Jim Cramer: Should We Abandon Quarterly Guidance?

How the Biggest Names in Corporate Governance Feel About Buffett & Dimon's Idea

How the Biggest Names in Corporate Governance Feel About Buffett & Dimon's Idea

Five Below Tops Expectations and 4 Other Stories to Watch Premarket Thursday

Five Below Tops Expectations and 4 Other Stories to Watch Premarket Thursday

How to Read Financial Statements

How to Read Financial Statements