EBITDA for FedEx reaches eight year high

CashFlowNews.com reports that EBITDA for FedEx Corporation for its quarter ended May 31, 2004 was USD1,042,000,000, a 27percent increase over the year earlier same quarter when FedEx generated USD822,000,000 in EBITDA. FedEx has generated thirty-four consecutive quarters of positive EBITDA. EBITDA for the most recent quarter also reached a eight year high.

For FedEx's twelve months ended May 31, 2004 EBITDA was USD3,231,000,000, compared with USD2,809,000,000, a 15percent increase over the comparable year earlier twelve months. EBITDA for the most recent twelve months also reached a seven year high.

The shares of FedEx were recently trading at USD81.57 which is within 3% of their ten year high of USD83.47 on July 21, 2004.

Inside Freight/Bear Stearns 22/7/05
Key Points
• FDX filed its 10-K filing for F2004 last Friday. In the proceeding bullets below we provide quick takeaways and
highlights from the filing including management’s outlook for each FDX operating division vs. our current and
unchanged operating assumptions (see Key Points Expanded below).
• Potential impact of a strengthening USD. Management indicated a hypothetical 10% strengthening of the USD
during F05 vs. foreign currencies in which FDX transactions are denominated would negatively impact projected
EBIT by an estimated $79M ($0.16/share) – our sense is mostly through the potential deterioration of IP yields.
• Incentivized compensation was up $240M ($0.49/share) y-o-y during F04 driven by FDX’ reinstatement of
incentivized pay which has been brought back gradually over the past 2 yrs and to a lesser extent better than
expected operating results. Our sense is with incentivized pay programs now fully in place, and lower FTEs at
Express, the expected y-o-y increase could be less dramatic during F05 vs. F04.
• FDX on track to open 70 Kinko’s during F05, in addition to converting some FedEx World Service Centers to
Kinko’s locations. This would represent roughly a 6% increase to 1,217 total Kinko’s locations at year end F04. We
believe this expansion not only provides for accelerating revenue at Kinko’s but also provides a modest boost for
volumes at Express and Ground.
• Other quick takeaways. During F05 management reiterated FDX’ pension expense is expected to be up $30M yo-
y which is $85M (or $0.17/share of y-o-y benefit) below the $115M y-o-y increase during F04, and gross capex
of approximately $1.65B.
INVESTMENT CONCLUSION: Yesterday, FDX closed flattish (versus the S&P 500 down modestly) on relatively
light volume. At a closing price of $80.82, FDX currently trades at 17.9x and 9.6x our unchanged twelve month forward
(11 months F05; 1 month F06) fiscal EPS and EV/EBITDA estimates. Our sense is that while the stock could take a
breather in the near term there remains strong upside potential over the next twelve months as FDX continues to beat
numbers and trade in-line to modestly above the S&P 500. Our six month C04 year end target price of $88 remains
unchanged and assumes the current 18x forward P/E out six months on our then forward 12 month C05 EPS estimate.
Currently the S&P 500 is trading at 16.7x and FDX is trading at about 1.1x on a relative basis. We would expect FDX to
trade in-line to modestly above the S&P 500 as we believe it is now less cyclical than the S&P 500 with better long term
internal growth characteristics. We reiterate our Outperform rating on FDX.
KEY POINTS EXPANDED:
Below we provide management’s F05 outlook per division as provided within FDX’ 10-K filing versus our unchanged
operating assumptions:
FedEx Express. In the filing, management indicated its expectations for “slight” total Domestic package y-o-y
volume growth, our sense is in a range of 0%-1% growth, during F05. We believe this is somewhat conservative
guidance given easier comps and the current direction of total Domestic volumes (FDX grew these volumes by
2.0% y-o-y during F4Q:04 albeit off an easy comparison). Management believes total Domestic package yield
growth will improve during F05 vs. a year ago, our sense after speaking with management is between 3%-5% yo-
y growth, boosted by Express’ fuel surcharge and relatively greater average package weight into improving
manufacturing volumes. We have modeled for total Domestic package yield growth of approximately 1.7% y-o-y
but see potential upside to this estimate. Management anticipates International Priority y-o-y volume and yield
growth to be the main driver for total Express revenue growth during F05 similar to its contribution in F04. We
do however note that a material strengthening of the USD vs. foreign currencies in which FDX conducts its
operations would have a potential negative impact on International Priority yield growth.
• FedEx Ground. Management anticipates a return to double digit y-o-y revenue growth during F05 which
compares to our estimate of 10.3% and reported 9.2% growth a year ago. Total y-o-y volume growth is
anticipated to be greater than the +5.0% figure posted during F04, our sense is between 5%-10% y-o-y, and we
have modeled for total Ground volume growth of 7.3% during F05. Management anticipates its general rate
increase and accessorial fees will be partially offset by the removal of Ground’s fuel surcharge during F05. We
have modeled for 1.8% y-o-y yield growth during F05 which compares to 3.8% y-o-y growth recorded during
F04. Management also anticipates margins at Ground during F05 to be flat on a y-o-y basis. This is in line with
our expected Ground OR of 86.5% versus 86.6% recorded during F04 as Ground expands operations, is
negatively impacted by losses at FedEx Supply Chain Solutions, and experiences the removal of Ground’s fuel
surcharge.
FedEx Freight. Although management was fairly vague with guidance for Freight (improving volumes and
yields throughout F05), we expect Freight to continue to perform very well during F05 as it takes advantage of the
strong economic environment. Strong economic demand and steady manufacturing production are driving higher
volumes with heavier freight and improving freight density in many lanes, enabling FedEx Freight to steadily
improve its margin. We expect Freight to lower its operating ratio (OR) by 70bp to 90.2% in F05 from 90.9% in
F04. Additionally, yields should continue to improve due to its 5.9% general rate increase, and the heavier and
denser mix of freight. Due to improving yields and volumes, we expect 13.6% y-o-y revenue growth in F05 vs.
10.1% revenue growth in F04.
• Kinko's. Management noted in the 10-K that FedEx Kinko’s plans on opening 70 new locations both
internationally and domestically in F05. These new store openings do not include the re-branding of FedEx
World Service Centers to FedEx Kinko’s, so in effect, Kinko’s will be adding a material number of new Kinko’s
locations above and beyond the planned 70 locations that it expects to add to its network in F05. Margins are
expected to decrease y-o-y but this includes (1) the allocation of a portion of FDX corporate headquarter fees as it
joins FDX as a subsidiary, (2) $20M in re-branding costs, and (3) the cost of new store openings worldwide. We
expect margins will get worse during F05 (6.9% vs. 7.5% during F04 – although F04 only represents 4 months of
operating results so its not a great comp). Removing the $20M in re-branding costs, we expect the margin to
remain fairly flat y-o-y.

EBITDA defined by CashFlowNews.com:

EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) is calculated by taking Operating Income and adding or subtracting depreciation and/or amortization.

CashFlowNews.com is the primary "cash flow" news source for over 10,000 public companies, monitoring and reporting on EBITDA, Cash Flow from Operations (CFFO) and Free Cash Flow (FCF).