FedEx Expects Upswing In Cargo

JUNE 23, 2011   THE WALL STREET JOURNAL

By VALERIE BAUERLEIN And BOB SECHLER

FedEx Corp. said Wednesday that it is increasingly bullish about the global economy and shipping growth, driven by the continued emergence of a vast middle class in India and China and by rebounding U.S. industrial production.

The big shipping and logistics company posted a 33% jump in profit for the fiscal fourth quarter ended May 31, boosted by exports from Asia and a surge in business use of its U.S. ground shipping services. It said it expects the strong results to continue.

The company said it expects a 3% uptick in U.S. gross domestic product in 2012, up from its estimate of 2.5% growth this year. FedEx also expects U.S. industrial production to climb 4.3% next year and 4.2% this year.

FedEx attributed recent global economic weakness to factors such as rising oil prices, bad weather and the Japan earthquake and nuclear disaster—constraints that the company said appear to be subsiding.

"The near-term [economic] softness will be temporary," Chief Executive Fred Smith told analysts on a conference call, citing a retreat in oil prices since April and a recovering Japanese economy. "Going forward, we see stronger economic growth. We believe the industrial sector will lead growth in the United States and overseas in the next two years, supporting shipping demand."

"International economic conditions continue to improve at a faster rate than in the U.S.," Chief Financial Officer Alan B. Graf Jr. told analysts on the call.

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FedEx and rival United Parcel Service Inc. are widely viewed as bellwethers of the global and U.S. economies because of the breadth of goods they deliver. Together the two companies carry roughly 3.5% of global gross domestic product at any given time, based on their own estimates, making them among the first to spot a downturn or turnaround.

"FedEx is a company that, if things were really that tough out there, they wouldn't be able to put up such good numbers," said Jerome Heppelmann, portfolio manager at OMCAP Investors.

Some cautioned that while the company's outlook for industrial growth bodes well for transportation and other companies, the implications of its forecast are less clear for the domestic economy overall, which is made up of many other sectors. "It's mixed signals, definitely, to see such strong optimism when other news is not so positive," said analyst Keith Schoonmaker of Morningstar Inc., who rates FedEx a "buy."

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FedEx showed growth across its business units, with its FedEx Express unit posting a 13% jump in revenue to $6.63 billion from the year earlier period, and a 4% increase in operating income to $429 million. The unit provides one-day to three-day delivery to 220 countries and territories, and is on pace to become more international than domestic.

FedEx Ground, which provides home and business delivery of small packages in the U.S. and Canada, posted a 15% increase in revenue to $2.26 billion and a 31% increase in operating income to $417 million.

For the fiscal year, FedEx Ground posted $1.3 billion in operating income in fiscal 2011, nearly doubling since 2008. FedEx said many businesses moved to slower ground shipping by truck during the economic downturn, because it is cheaper than overnight shipping by air. Many of those businesses are sticking with ground shipping, saying it suits their needs well enough.

In 4 p.m. trading on the New York Stock Exchange, FedEx shares were up 2.6% at $91.44. The stock has risen 19.6% over the past year.

FedEx benefits from a particular slice of market growth, including emerging markets and domestic freight transit. It is less clear what shipping trends mean for consumers, especially since unemployment was 9.1% in May and fuel is a question mark.

Mr. Smith told analysts on the conference call that his economic outlook was "infantry-based," formed by "actually talking to hundreds of thousands of customers."

The cautionary note is fuel, Mr. Graf said in an interview. The company's outlook is underpinned by an assumption that oil prices will average around $95 a barrel in its current fiscal year. "All bets are off" if oil retraces its 2008 highs above $130 a barrel, he said.

The results bode well for railroads and other transportation businesses posting results in the coming weeks, as well as companies with exposure in emerging markets. UPS is expected to release results July 26 and said in its March proxy that it expected record results in 2011.

FedEx said it continues to buy planes make other capital investments in technology, in part to take advantage of the Tax Relief Act passed in December, but also to prepare for continued growth.

Overall, FedEx reported fiscal fourth-quarter profit of $558 million, or $1.75 a share, up from $419 million, or $1.33 a share, a year earlier. Revenue jumped 12% to $10.55 billion.

—Jonathan Cheng contributed to this article.

Write to Valerie Bauerlein at valerie.bauerlein@wsj.com and Bob Sechler atbob.sechler@dowjones.com