FedEx cuts 2Q, full-year outlook

The Memphis-based shipper blamed soaring fuel costs and a troubled U.S. freight market for the reduced estimate that led the company's shares to plunge 4.5 percent and set a 52-week low on Friday.

Alan B. Graf Jr., FedEx's chief financial officer, said in a release that the company's fuel surcharge system can't react quickly enough to cover rapid fuel price increases. He said fuel costs have risen more than 8 percent, or $85 million, since September.

Jet fuel prices have risen about 30 percent over the same period, Robert W. Baird analyst John Langenfeld said in a note to investors. "We see further risk to estimates if fuel levels do not stabilize," he said.

FedEx previously reduced its full-year outlook in September on worries about economic uncertainty from the downturn in the housing market.

Citigroup's John Kartsonas told investors that FedEx's fuel surcharges lag price changes by about six weeks, which explains short term effects on earnings.

"However, the lower annual guidance points to a more pessimistic outlook by the company, as fuel volatility tends to adjust over time, something that is not reflected in today's announcement," he said.

FedEx's less-than-truckload freight trends have been weak, "despite economic signs that the decline in U.S. industrial production has hit bottom," Graf said.

The company is reviewing ways to cut expenses and is evaluating its capital investment plans, he said.

FedEx's second quarter ends Nov. 30 and does not take into account most holiday shipments. FedEx Express, the company's air-cargo division, traditionally experiences its busiest days in December.

FedEx said it expects to earn $1.45 to $1.55 per share in the second quarter, compared with a previous forecast of $1.60 to $1.75 per share. For the fiscal year ending in May, the company forecast earnings of $6.40 to $6.70 per share, down from a prior range of $6.70 to $7.10 per share.

Analysts polled by Thomson Financial had expected the company to earn $1.71 per share for the quarter and $6.87 per share for the year.

Dan Ortwerth, an analyst with Edward Jones, said he will continue to recommend investors take a long-term view.

"For us the decision is that this company is doing everything it needs to do to deliver long-term returns," he said. "This is just a rough patch."

FedEx shares fell $4.57, or 4.5 percent, to $96.80 Friday, after sinking to a 52-week low of $96.10 earlier. Shares of rival shipper United Parcel Service Inc. closed down $1.09, or 1.5 percent, to $72.01.

Both UPS and FedEx had recently announced rate increases averaging about 4.9 percent for next year.

The UPS rate increase affects ground, air express and international shipments that originate in the United States and take effect Dec. 31.

FedEx said in late October the increase affects its air shipping rates within the U.S. and for export in 2008. It said its rates are expected to go up for ground shipping in the U.S. as well.