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FedEx Tops Earnings Estimates Amid 'Tepid' Economic Growth

Despite "tepid" economic growth, FedEx (FDX) reported fourth-quarter earnings that easily topped analyst forecasts as its ground shipping focus paid off.

The world's No. 2 delivery company after UPS (UPS) gave weak guidance for the current year and said it will cut some U.S.-Asia capacity.

FedEx Ground revenue reached $2.78 billion in the quarter ended May 31. That was 12% above a year earlier.

In contrast, revenue for the Memphis, Tenn.-based company's FedEx Express rose just 3% to $6.98 billion, while FedEx Freight revenue fell 1% to $1.39 billion.

Overall revenue rose 4% to $11.44 billion, just below analyst estimates for $11.46 billion.

Earnings rose 7% to $2.13 a share, excluding restructuring costs and an aircraft write-down, far above estimates for $1.96. It was the first EPS gain in a year.

FedEx shares rose 1% on a bad market day overall. UPS fell 1%.

Operating margin improved to 9.6% from 9% a year earlier.

Results were slightly better than those by UPS in its most recent quarter. For its Q1, UPS logged a 4% EPS gain while revenue rose 2% to $13.4 billion.

For the current year, FedEx forecast adjusted earnings will grow 7% to 13% to $6.67 to $7.04 a share. Analysts expected $7.31.

FedEx experienced "tepid economic growth," CEO Frederick Smith said in a statement. Executives said the outlook is "highly uncertain," but kept their full-year GDP growth forecasts at 2% for the U.S. and 2.3% worldwide.

Smith noted that customers continue to shift to "less costly international shipping services.

FedEx and other shippers have had to adapt as more customers receive goods via inexpensive ground shipping. International economy volume rose 11% in Q4 while priority shipments slid 2%.

FedEx Express will further cut delivery capacity between America and Asia next month.

While FedEx Ground contributes less than a quarter of overall company revenue, it accounts for about half of operating income, Trefis analysts noted.

FedEx Ground offers small-package delivery in the U.S. and Canada. It includes FedEx's SmartPost service, which uses a hybrid delivery mechanism leveraging the networks of the U.S. Postal Service and Canada Post for final delivery.

"With growing expectations of free shipping of goods purchased through the fast-growing electronic market, e-retailers are increasingly adopting the low-cost hybrid alternatives like SmartPost to cut down on shipment costs," Trefis noted.