FEDEX ISSUES CONSERVATIVE GUIDANCE – GET USED TO IT
As always, FedEx earnings provided us with a good look at the global economy. The big news from their earnings report was disappointing guidance, but that might be more a reflection of an inept analyst community as opposed to a quickly deteriorating economy. Their full year and quarterly guidance was well below expectations:
“The forecast for earnings of $4.40 to $5 per share, which trails analyst predictions of $5.05 per share, reflects expected higher costs as shipping volume picks up. But the company is still banking on a continued recovery in the global economy.
The Memphis, Tenn., company expects to earn 85 cents to $1.05 per share for the quarter ending in August. Analysts are expecting $1.03 per share.”
On the conference call, however, FedEx executives sounded fairly confident with regards to the state of the global economy. Specifically, they see continuing economic improvement and prices stabilizing:
“We believe the improving economy will result in a more stable pricing environment.”
Business is at its strongest levels since 2007 with Asia and Latin America leading the way:
“International load factors are at their highest levels since 2007. Asian and Latin America are particularly strong.”
Thus far, they are seeing a muted impact in Europe:
“We’ve seen solid growth in Europe.”
Still, they recognize that the environment is fluid and they could be singing a different tune next quarter:
“There are so many things going on (at the macro level) that we could have a different tune in September”
All in all, it sounds like the global economy is more stable than many might think, however, the key takeaway here is that analysts are exceedingly optimistic. FedEx is likely to reflect the broader outlook from executives this quarter – an outlook that I expect to be very cautious given the potential downside risks. H2 expectations have been boosted substantially in the last few months. Given the macroeconomic risks it would not be surprising to see executives issue disappointing guidance across the boar during the upcoming earnings season.
As the economy rebounds and companies replenish inventories and rehire workers, their costs are going to increase. (As noted by AP with respect to Fed Ex, “The outlook also reflects expected higher costs as shipping volume picks up.”)
Meanwhile, sales volumes may continue to grow or stabilize, yet their top-line revenue growth could be simultaneously tempered or flatline as they prioritize building market share over margin, i.e. Walmart cutting prices as it tries to keep Target and other competitors at bay.
As a result, earnings may start to disappoint. That isn’t to say that earnings will necessarily be bad, but the cost increases may match or outpace the revenue growth, which will temporarily hit (or at least constrain) earnings and confuse the analysts who didn’t do the math and see that coming.
Given how prone to panic the markets are these days, this change in the dynamic may contribute to the ongoing volatility that has characterized the last few years, as analysts overreact to the bottom line while missing the broader picture. They tend to either jump the gun or else are late to the party; I suspect that TPC will agree that they do a poor job of seeing this stuff in real time.
I think that’s a good assessment. Economic growth isn’t falling off a cliff due to Europe, but the risks (in terms of corporate profits) at this point probably lie to the downside due to very high H2 estimates. There are many potential headwinds that could unfold over the coming 6-12 months that could dampen the bullish analyst outlook.