Will FedEx Earnings Deliver Faster Growth?

FedEx will release its quarterly report on Wednesday, and investors have recently been extremely upbeat about the stock's prospects, bidding shares to levels not seen since 2007. With so much optimism, it'll be important for FedEx earnings hold up well, both for its stock's sake and as a bellwether of the entire global economy.

FedEx is often seen as a barometer of economic activity because when businesses are thriving, they tend to transport more of their goods to customers and FedEx gets its share of delivery business. Yet equally important factor is how customers decide to ship their goods, as prices for different delivery expectations can vary widely and have a big impact on FedEx's overall profit margins. Let's take an early look at what's been happening with FedEx over the past quarter and what we're likely to see in its report.

Stats on FedEx

Source: Yahoo! Finance.

How high will FedEx earnings fly this quarter?
Analysts have marked down their view on FedEx earnings substantially in recent months, cutting $0.08 per share from their August-quarter estimates and about $0.40 per share from their fiscal 2014 and 2015 full-year projections. Despite those cuts, the stock has managed to climb 10% since mid-June.

FedEx's May-quarter report shows some of the challenges that the company has gone through lately. Even though it managed to produce impressive earnings after adjusting for the costs of restructuring its business and for charges related to its aircraft fleet, it continues to see pressure ahead, and shareholders took the pessimistic view in bidding the stock downward.

But in early July, FedEx stock recovered its lost ground on speculation that hedge fund maven Bill Ackman might take a stake in the delivery company. Those rumors came to naught, though, as the target Ackman had described turned out to be Air Products & Chemicals rather than FedEx. But the shares held onto much of their gains regardless.

FedEx does face weakening demand for its air cargo services, as customers shift more of their business to ground shipping services. Even internationally, customers have been willing to accept slower shipping methods. In response, FedEx is consolidating its priority-shipping capacity to cut costs and better reflect customers' wishes. That has the arguably unintended benefit of making the company a better competitor against UPS , which has historically had an edge over FedEx in ground transportation. When UPS announced its own negative earnings report in July, FedEx shares jumped in response. Moreover, the $1.5 billion in expected cost savings could help boost margins and produce even greater earnings growth in the years to come.

One big question for FedEx is what will happen if a national online shopping sales tax takes effect. FedEx and UPS have both benefited from Amazon and eBay selling goods that in most states aren't subject to sales tax, as customers have been willing to pay what often amounts to lower shipping costs than the sales tax they save. Amazon has actually favored an Internet sales tax, but eBay has argued the move hurts its small-business customers. FedEx could end up the loser if higher prices drive more people to bricks-and-mortar retailers once the Internet sales-tax advantage goes away.

In the FedEx earnings report, watch to see how well the company's restructuring efforts are going. If it can get its aircraft overcapacity issue taken care of quickly, then FedEx could see earnings growth start to accelerate once more.

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The article Will FedEx Earnings Deliver Faster Growth? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends FedEx and United Parcel Service. It recommends and owns shares of Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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