July 26, 2010 / 1:24 PM / 7 years ago

FedEx raises outlook, cites improving economy

NEW YORK (Reuters) - FedEx Corp (FDX.N) raised its outlook on Monday due to a surge in the number of packages flowing through its air and ground networks, boosting its shares and the broader market.

FedEx shares were up about 5 percent during afternoon trading after the economic bellwether said a “continued modest recovery” worldwide would boost its business in the first quarter. The Standard & Poor’s 500 was up 0.9 percent on both FedEx’s forecast and a June jump in new home sales.

“This is macro-related. It’s a volume-driven story,” said BB&T Capital Markets analyst Kevin Sterling, who has a “buy” on FedEx shares and a price target of $100.

Both FedEx and larger rival United Parcel Service Inc (UPS.N), the world’s largest package delivery company, are considered proxies for global economic health because their businesses expand during boom times and shrink in recessions.

For the first quarter ending on August 31, FedEx raised its earnings per share forecast to a range of $1.05 to $1.25, up from a prior view of 85 cents to $1.05 and ahead of analysts’ estimates of $1.01, according to Thomson Reuters I/B/E/S.

Demand for high tech electronics and their components out of Asia is driving an estimated 20 percent first-quarter volume increase in the company’s premium “International Priority” service, which ships goods from country to country as fast as overnight, said spokesman Jess Bunn. Last quarter, International Priority volume rose 23 percent.

Business customers are relying on this high-end service in the aftermath of the recession because companies have begun to restock inventories but still want to keep levels low, thus creating a need for rapid turnaround, Bunn said.

UPS CEO Scott Davis sounded the same note after the company released earnings last week, saying “Clearly, this is a business-led recovery. You’ll see industrial production grow faster than GDP. That’s driven by the manufacturing side.”

Earnings from major U.S. industrials last week showed signs that the economic recovery was holding, pushing up demand for products of all kinds.

So confident is Memphis, Tennessee-based FedEx in the sustainability of its improved business that it also said it would restore its company match for employees’ 401(k) plans effective January 1. The payment had been cut as a cost-control measure in the face of the recession.

    With the higher forecast for its fiscal first quarter, FedEx now sees full-year earnings of $4.60 per share to $5.20 per share compared with analysts’ expectations of $4.98. Previously it had projected $4.40 to $5.00.

    Both FedEx and UPS are poised to benefit from even a slow economic recovery because during the downturn, they cut expenses such as 401(k) matches and became more efficient, Sterling said. “They’re getting volume, which is growing the top line, and they’ve got leverage on the bottom line.”

    “We continue to like both FedEx and UPS as we see strong leverage to volume growth amidst a more stable pricing environment,” Deutsche Bank analyst Justin Yagerman wrote in a note to clients. He has a “buy” on FedEx as well.

    FedEx shares were up 5.4 percent at $83.23 in afternoon trading on the New York Stock Exchange, while UPS gained 1.6 percent to $64.71.

    UPS shares also rose last week when the company raised its outlook while reporting second-quarter earnings.

    Reporting by Helen Chernikoff, editing by Gerald E. McCormick and Lisa Von Ahn

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