FedEx outlook seen ominous for truckers

By Nick Carey - Analysis

CHICAGO (Reuters) - FedEx Corp's (FDX.N) Friday reduction of its profit outlook because of high fuel costs and weak demand is a bad omen for small U.S. trucking companies that have been hammered by both.

"Trucking companies are getting squeezed at both ends -- by fuel costs and the fact that high gasoline costs are hurting consumers," said Lee Klaskow, an analyst at Longbow Research. "In recent downturns the (U.S.) consumer has shouldered the burden and eased the blow for trucking companies, but this time they may not be able to because of the price of fuel.

"Smaller trucking companies in particular face extremely stiff headwinds."

The U.S. trucking sector has been hit by weak demand since the third quarter of 2006, caused by lackluster retail and auto sales, the housing sector meltdown and faltering U.S. economic activity. Excess truck supply has pushed prices down, as competition for business is fierce.

"There's been plenty of pain from low volumes in the trucking sector and everyone's hanging on for the turnaround," said Keith Schoonmaker, an analyst at Morningstar.

But should smaller operators be forced out of the market in the meantime by high fuel costs and continued low volumes, some analysts say it might be good long-term news for larger companies, as lower supply should allow them to boost the rates they charge.

After the market closed on Friday, Memphis-based FedEx said it now expects earnings per share for the fourth quarter ending May 31 in a range from $1.45 to $1.50, down from its previous forecast of $1.60 to $1.80. When FedEx gave that that previous outlook in late March, company Chief Financial Officer Alan Graf warned that volatile fuel costs made the forecast uncertain.

The package delivery company said on Friday that spiking oil prices had raised estimated fuel costs for the quarter by 7 percent. The cost increase, plus restrained demand for the company's U.S domestic express business and its less-than-truckload services, would result in the earnings shortfall, FedEx said.

Less-than-truckload (LTL) operators consolidate smaller loads into a single truck.

Like its main rival United Parcel Service Inc (UPS.N) and the railroads, FedEx passes on higher fuel costs to customers, but there is a time-lag before its price increases take effect.

"When fuel prices spike, carriers are temporarily exposed," Morgan Stanley analyst William Greene wrote in a research note. "We'd also note that this new (FedEx) guidance assumes no additional increase in fuel and no further weakening in GDP, so we see potential risk even to the revised numbers."

SPIKING COSTS

Wachovia analyst Justin Yagerman wrote in a research note that the news from FedEx could act as a drag on some trucking stocks. In trade on Monday, YRC Worldwide Inc (YRCW.O) stock was down more than 4 percent while Con-way Inc (CNW.N) was down 0.6 percent. Both companies are LTL operators. FedEx's own shares were off 16 cents or 0.2 percent at $90.21.

"Longer-term, rising fuel costs should continue to accelerate trucking failures, which we believe will eventually lead to a tighter supply/demand environment for the trucking industry," Yagerman wrote. "However, in the short-term these higher fuel costs likely translate into a material earnings headwind."

Truck companies are paying nearly 50 percent more for diesel than at this time a year ago. Last week the U.S. Energy Information Administration said it expects retail diesel fuel prices to average $3.94 per gallon in 2008, up from $2.88 per gallon last year.