FedEx misses on earnings, but sees higher margins ahead

FedEx Q3 misses but sees higher margins

FedEx on Tuesday reported worse-than-expected quarterly operating earnings, but an optimistic outlook for margins in the near-term soothed investor concerns and pushed the stock higher in after-hours trading.

Shares of FedEx, often considered a bellwether for the U.S. economy like rival UPS because they offer a window into how the economy is faring, dropped around 4 percent after the company released earnings, but bounced back to trade up 2.4 percent to $196.39.

"Looking at the quarter in isolation, its not great, but looking forward, which is what the market is going to focus on, it actually looks fairly bright," said Logan Purk, an analyst with Edward Jones.

Chief Executive Officer Fred Smith said in a conference call with analysts that the company expects a margin of "15 percent plus in the current quarter" for the ground segment, and was broadly optimistic beyond that.

"Margins, cash flows and returns are going to increase over the next several years," he said.

The company has been grappling with lower margins on its ecommerce business, as deliveries to individual homes are typically more expensive than deliveries to businesses that often get several packages at once.

FedEx has also faced increased competition from Amazon , which has expanded into the delivery business.

But the company on Tuesday dismissed Amazon's move into that area.

"Let me just say that Amazon is a longstanding customer of ours," said Raj Subramaniam, executive vice president of global marketing and communications. "They still rely heavily on USPS, UPS and FedEx for delivery."

Smith said Amazon was unlikely to pose a major threat to FedEx.

"Amazon is a wonderful company, and they certainly have revolutionized the ecommerce world, and we're not sure what Amazon's going to do one way or another," he said. "But the FedEx system that consists of thousands of facilities ... has been decades in the making," Smith said.

Revenue rose 19 percent, however, reflecting a rise in fuel and other costs, margins were lower in the ground and freight segments and net income rose only 11 percent.

The Memphis-based company reported net income for its fiscal third quarter ending Feb. 28 of $562 million or $2.07 per share, up from $507 million or $1.84 per share, a year earlier.

Adjusted for one-time items, the company reported earnings per share of $2.35. Analysts had expected $2.62 per share.

FedEx posted revenue of about $15 billion, compared to $12.65 billion for the year-ago quarter.