updated 12/20/2006 2:08:03 PM ET 2006-12-20T19:08:03

FedEx Corp. reported better-than-expected quarterly earnings Wednesday on higher revenue in almost all units, but forecast profit in the current period below Wall Street estimates.

The package delivery company’s shares fell more than 4 percent in early trading as investors expressed disappointment with the outlook. But analysts said FedEx has a track record of issuing conservative forecasts.

“I am not surprised that they are being a bit conservative, given the current economic environment,” said Peter Smith, a transportation analyst at Morningstar. “This is a company that likes to underpromise and overdeliver.”

Along with its main rival, United Parcel Service Inc., FedEx is considered a bellwether of the U.S. economy, based on the premise that strong package deliveries translate into economic growth, while weak deliveries mean a slowing economy.

The weak FedEx earnings forecast weighed on stock prices in early trading. The company’s chief executive, Fred Smith, said he expects healthy global economic growth over the next six months, but slightly slower U.S. growth.

FedEx reported net income of $511 million, or $1.64 a share, for the fiscal second quarter ended November 30, up from $471 million, or $1.53 a share, a year earlier.

The company said its new labor agreement with its pilots, ratified by the pilots’ union in mid-October, reduced earnings by about 25 cents a share.

Excluding that one-time expense, the company earned $1.89 per share. On that basis, analysts’ average forecast was $1.76, according to Reuters Estimates.

“Altogether, it looks like a pretty good quarter,” Morningstar’s Smith said.

The Memphis, Tennessee-based company said revenue at its express delivery unit, FedEx Express, rose 6 percent to $5.69 billion, but operating margin fell to 8.8 percent from 8.9 percent.

Revenue at ground-delivery unit FedEx Ground rose 16 percent to $1.52 billion, while revenue at freight unit FedEx Freight was up 31 percent at $1.23 billion.

FedEx Kinko’s, however, continued to struggle, with revenue down 2 percent at $519 million.

In the forecast that disappointed Wall Street, the company said it expects fiscal third-quarter earnings of $1.20 to $1.35 per share, well below analysts’ average forecast of $1.54.

The company forecast full-year earnings of $6.60 to $6.90 per share, excluding the one-time charge related to the pilots’ agreement. Analysts’ average forecast is $6.82.

In a conference call with analysts, FedEx’s CEO said he expects slightly slower U.S. economic growth over the next six months due to weakness in the housing industry.

Fitch Ratings transport analyst Stephen Brown said that given the uncertainty over the U.S. economy, “the challenge for FedEx moving forward will be on the cost side against potentially lower demand from the retail sector.”

Lower demand may in particular affect FedEx’s ground and freight units, which are more sensitive to a softening economy, Brown said.

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