UPDATE 3-FedEx global economic view darker, shares drop

Thu Mar 22, 2012 11:36am EDT

* Q3 EPS ex-items $1.55 vs $1.35 Wall St view

* Revenue $10.56 bln vs Wall St view of $10.6 bln

* FedEx expects $1.75-$2.00 per share in Q4

* Expects mild European recession

* Shares down 4 pct in late morning trading

By Lynn Adler

March 22 (Reuters) - A strong holiday season and mild winter helped FedEx Corp beat Wall Street's profit forecast, but the world's No. 2 package delivery company warned that it had lowered its outlook for the rest of this year due to tepid economic growth.

FedEx expects continued below-trend growth globally and a mild Euro-zone recession.

"This is a business highly leveraged to the global economy and global economic growth has not been so great," said Matt Collins, analyst at Edward Jones in St. Louis, which still rates the company's shares a "buy" based on longer-term economic trends.

Newly released manufacturing indicators for China, Germany and France drove home the faltering pace of recovery.

"They did a great job managing the business, but volumes just aren't as strong as we'd like to see," said Collins.

FedEx on Thursday set a fiscal fourth-quarter profit target of $1.75 to $2.00 per share, compared with analysts' average expectation of $1.98, according to Thomson Reuters I/B/E/S.

The Memphis, Tennessee-based company's shares fell 4 percent to $91.95 in late morning trade on the New York Stock Exchange.

"The fourth quarter is still very good, but what we're seeing at the moment ... is we just don't have as strong an economy as we would have hoped it would be a year ago," Chief Financial Officer Alan Graf told analysts on a conference call.

"The economic environment and the elasticity that we're seeing on our premium services due to high fuel costs are dampening momentum a bit."

The company said more expensive fuel was prompting customers to choose to ship goods by truck rather than air to save money.

FedEx said on Thursday that net earnings in the third quarter that ended Feb. 29 rose to $521 million, or $1.65 per share, from $231 million, or 73 cents a share, a year earlier.

Excluding one-time items, profit rose to $1.55 per share from 81 cents a year ago. On that basis, analysts had expected $1.35 per share.

Revenue increased 9 percent to $10.56 billion from $9.66 billion a year ago. Analysts on average were expecting $10.6 billion, on average, according to Thomson Reuters I/B/E/S.

"This is a very good year for them and quite frankly it isn't even a year where they're hitting on all cylinders. There's a lot of upside potential for this company," said Art Hatfield, managing director in equity research at Morgan Keegan in Memphis. "We're looking at a company that's probably pretty close to prior peak earnings, but they're nowhere near operating at peak levels with regards to margins and other things."

FedEx shares are still up about 10.3 percent so far this year, compared with larger rival United Parcel Service Inc , which is up 9.5 percent and the broad Standard & Poor's 500 index, which is up 10.5 percent.

Both companies have been able to push through rate increases to customers this year and each reported record holiday shipping driven by escalating demand for on-line shopping.

EUROPEAN STRATEGY UNCHANGED

UPS on Monday reached a $6.85 billion deal to buy Dutch peer TNT Express, extending its lead over FedEx in Europe.

FedEx Chief Executive Fred Smith declined to comment on the UPS and TNT tie-up but said his company's approach in Europe would not change.

"FedEx Express has a profitable multibillion-dollar business in Europe and it is growing strongly," Smith told analysts. "We are very confident in our plans to continue expansion, primarily through organic growth."

FedEx is undergoing a fleet upgrade to improve fuel efficiency, having announced in December that it was buying new Boeing aircraft to replace some aging planes and delaying delivery of others to cut expenses.

Graf said FedEx will continue to reduce flight hours and park planes in the desert until economic conditions improve.

The massive volume of goods moved by FedEx makes its shipping trends a bellwether of consumer demand and the pace of economic growth.

The value of packages FedEx handles in its trucks and planes each year is equivalent to about 4 percent of U.S. gross domestic product and 1.5 percent of global GDP.

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