FedEx earns dip due to weak US economy, fuel costs

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CHICAGO (Reuters) - Package delivery company FedEx Corp <FDX.N> reported lower quarterly profit on Thursday, citing weak U.S. economic growth and high fuel costs, and gave an outlook for the current quarter below analyst estimates, sending its shares 1 percent lower.

By Nick Carey

CHICAGO (Reuters) - Package delivery company FedEx Corp <FDX.N> reported lower quarterly profit on Thursday, citing weak U.S. economic growth and high fuel costs, and gave an outlook for the current quarter below analyst estimates, sending its shares 1 percent lower.

Like its main domestic rival, United Parcel Service Inc <UPS.N>, Memphis, Tennessee-based FedEx is seen as a bellwether of U.S. economic activity, based on the simple premise that a growing economy leads to more packages being sent.

FedEx beat Wall Street expectations with its net income for its fiscal second quarter, ended November 30, of $479 million, or $1.54 a share -- down 6 percent from $511 million, or $1.64 a share, a year earlier.

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Wall Street analysts on average expected earnings per share of $1.50, according to Reuters Estimates.

But for the current quarter, FedEx said it expects to earn $1.15 to $1.30 per share -- below the $1.40 forecast by analysts.

"The real story here is the state of U.S. domestic freight and when things are going to turn around," said Allan Meyers, a principal of the AMBS Investment Counsel in Grand Rapids, Michigan, which owns FedEx stock.

"The outlook FedEx gave for the current quarter and the fact they have cut their capital expenditures demonstrate that they are not looking for any near-term improvement."

He added: "This will last at least for the next quarter and probably beyond."

Company executives said weak U.S. economic growth would continue to hurt FedEx results but its growth elsewhere in the world, especially China, would partly offset this.

"High fuel prices and weak U.S. economic growth year over year have impacted our business," FedEx Chief Executive Fred Smith said in a statement "We continue to benefit from solid international growth, which helps mitigate softness in U.S. industrial production."

In a conference call with analysts, FedEx Chief Financial Officer Alan Graf and other officials highlighted strong growth in the company's business in China.

Analysts in the transport sector have been warning that high fuel costs and slower U.S. economic activity could hurt company results. On Wednesday Union Pacific Corp <UNP.N>, the largest U.S. railroad, lowered its fourth-quarter forecast, citing the recent rapid rise in the cost of diesel fuel.

"We expect the ongoing domestic freight recession, rising fuel prices, and FedEx investment initiatives to negatively impact near-term earnings," R.W. Baird & Co. analyst Jon Langenfeld wrote in a research note. "Long term, we believe FedEx remains attractive, though we recommend investors wait to commit new money until greater clarity in near-term earnings emerges."

Baird maintained its "neutral" rating on FedEx stock.

FedEx also warned that it faces "increased regulatory and legal uncertainty" over the independent contractor model it uses at its FedEx Ground unit, which could result in higher costs. The company is fighting against a number of lawsuits claiming these contractors should be classed as employees.

"This is FedEx's first public acknowledgment of which we are aware that the Ground legal suits could materially impact the future cost structure of that business," Bear Stearns analyst Edward Wolfe wrote in a research note.

Continued legal woes for FedEx could boost UPS, he added.

FedEx said full-year earnings per share should be in a range from $6.40 to $6.70. The average analyst forecast for the full year is earnings per share of $6.47.

In its fiscal second quarter, FedEx reported revenue of $9.451 billion, up from $8.926 billion a year earlier. This was above the $9.331 billion forecast by analysts.

Revenue at FedEx's flagship express unit, FedEx Express, rose 6 percent to $6.04 billion from $5.69 billion. The company's ground delivery unit, FedEx Ground, saw revenue rise 12 percent to $1.70 billion from $1.52 billion.

FedEx's trucking unit, FedEx Freight, saw revenue rise less than 1 percent to $1.24 billion from $1.23 billion, as the weak U.S. economy resulted in a 6 percent decline in shipments.

In late afternoon trading on the New York Stock Exchange, FedEx shares were down $1.09, or 1.2 percent, at $93.54.

(Editing by Gary Hill)