FedEx Profit, Hurt by Fuel Costs, Falls Below Forecasts

FedEx Corp., the second-largest U.S. package-shipping company, said Thursday that rising fuel prices helped push fiscal fourth-quarter profit below analysts’ estimates and that profit in the next fiscal year might fall short of projections because of rising fuel prices and competition holding rates down.

FedEx shares fell 8.3%, the biggest drop in three years.

The Memphis, Tenn.-based company also projected first-quarter profit of $1.10 to $1.25 a share and $5.20 to $5.45 for the fiscal year ending May 2006. Analysts in a Thomson First Call survey expected FedEx to earn $1.26 a share this quarter and $5.48 for the year.

The surcharges that FedEx uses to soften the effect of higher fuel prices didn’t keep up with price gains in the quarter, while the rising cost of oil encouraged customers to use FedEx’s less costly services, causing revenue growth to slow. The price of jet fuel is up 39% this year and matched a record high $1.75 a gallon this month.

FedEx shares Thursday declined $7.35 to $80.77.

Profit in the quarter ended May 31 rose 9% to $448 million, or $1.46 a share, from $412 million, or $1.36, a year ago, the company said. Sales increased 10% to $7.72 billion. Analysts were forecasting earnings of $1.48 a share for the quarter.

FedEx recoups higher jet fuel costs through a surcharge that rises based on an index of prices. Changes in the surcharge lag behind actual price movements by about a month. The difference reduced FedEx’s earnings per share by about 9 cents in the quarter, Bear Stearns analyst Edward Wolfe estimated this week.

The company also will “absorb significant pension cost increases” in coming quarters, which will help damp profit growth, FedEx Chief Financial Officer Alan Graf said on a conference call with analysts. FedEx also will see costs tied to the start in March of an around-the-world flight, he said.

FedEx’s estimate for fiscal 2006 is 10% to 15% higher than the $4.72 a share it earned the previous year. FedEx’s net income per share rose 71% in fiscal 2005 after a gain of 0.7% in 2004 and growth of 14% to 18% in the previous three years.