FedEx F3Q:08 Preview
FDX F3Q:08 Preview – Likely More of the Same
FDX TO REPORT F3Q (FEB) QTR ON THURS, MARCH 20TH. With the potential for pre-reports prior to a competitor's conference this Wed., followed by FDX’ report on Thurs, we suspect this could be a tumultuous week for the transports. We have little insight into FDX report, but expect more of the same with recent reports from FDX where they beat low expectations but on-going numbers move downwards.
WE REMAIN BELOW CONS. Our unchanged USD 6.28 and USD 6.54 EPS estimates for F08 and F09 remain 1% and 8% below current Cons. of USD 6.33 and USD 7.13. We believe we are generally below Cons. mostly as a result of our expectations for increased drags on Ground costs related to on-going and unforeseen new issues related to the contractor model. We assume only 3% EBIT growth for Ground for F09 and we suspect Cons. assumes closer to 20% Ground EBIT growth.
FUEL LIKELY A DRAG BUT NOTHING LIKE LAST QUARTER. We estimate roughly that net fuel impact (higher y-o-y fuel costs net of higher y-o-y surcharge rev) will represent about a USD 0.04 net drag on EPS during F3Q, much less of a drag than the estimated USD 0.29 drag in F2Q y-o-y, but not the net benefit we had expected earlier in the qtr.
MORE VISIBILITY INTO THE FREIGHT ECONOMY. UPS recently noted that after relatively solid Dec. and Jan. months that Feb. and early March dom. package vols. weakened once again. It will be interesting to see if FDX experienced similar trends, or whether UPS’ trends were accented by its Teamsters contract ratification (see ATA data below). Our sense is FDX likely showed similar trends with relative strength most of the qtr. Int’l vols. remain solid.
WE REMAIN ON THE SIDELINES. Despite FDX’ seemingly appealing valuation at 13x our low end forward EPS, we continue to see risk from FDX’ contractor model going forward. FDX tends to update legal and tax issues related to its contractors during its 10Q filings right after earnings reports, so we believe there remains risk around earnings periods.
INVESTMENT CONCLUSION: FDX stock has remained under pressure with the rest of the market the past week and since UPS warned last Wednesday during its analysts meeting of slowing domestic volumes over the past six weeks. For the full year to date FDX is now down 5% compared to UPS down 2% and the S&P 500 down 12%.
FDX is currently trading at 13.3x and 5.6x our forward twelve month EPS and EV/EBITDA estimates. This compares to UPS at 15.7x and 8.6x . This also compares to FDX’ 1, 3 and 5 year averages of 14.1x, 15.3x and 16.6x and 6.0x, 6.3x and 6.6x . While valuation for FDX seems compelling, and we continue to believe we are close to a point where domestic operations are at a bottom relative to the economy, we continue to have longer term concerns about FDX’ Ground contractor model and FDX need to spend money to attempt to show less control over its franchisees. As a result gradually over the next five years we expect FDX past ten year Ground volume CAGR of 10% to decelerate towards 5%-6%, while we expect UPS to see its past ten year Ground volume growth CAGR of 2% to gradually increase to about 3%. For now we remain very comfortable on the side lines with a Peer Perform rating on FDX and an Outperform rating on UPS. We do not recommend playing FDX’ stock into the quarter one way or another as we expect solid earnings and continued tempered guidance, with the potential announcement of further legal, tax or operating changes around Ground in its release or 10Q filings. FDX remains rated Peer Perform.
