FEDEX: THE GLOBAL ECONOMY IS SLOWING
FedEx is probably my favorite earnings report. For many reasons. Not only is it a good bellwether, but the FDX report is truly the start of earnings season. For someone who used to wake up at 3AM to trade earnings reports back in another life FedEx was always the start of the exciting news reporting season. This is when the corporate profit reporting season starts to get interesting. And I guess we can say that FedEx started things off with tempered optimism (don’t you hate terms like that? As my old partner at Merrill used to say – “pick a side Cullen!”). Here are the key takeaways from the FDX report:
- FDX is still expanding margins modestly. This is an interesting development given the broad expansion in margins across corporate America. We’ll have to see how margins hold up as the reporting season continues. The current margins are certainly not sustainable.
“We are focused on improving margins in all businesses, although we face certain cost increases in fiscal 2013,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “These headwinds include higher employee-related costs, including higher pension expenses of approximately $150 million due to a historically low discount rate on our May 31, 2012 measurement date, as well as higher depreciation costs. We expect to mitigate these challenges by reducing costs and improving efficiencies, and are continuing to evaluate additional actions to substantially improve FedEx Express margins.”
- We’re still seeing tepid revenue growth. At 4%, the Q4 earnings were in-line with last year’s growth rates. If the global economy continues to slow and the fiscal cliff materializes the risk here is to the downside which will translate directly to the margin squeeze.
- Global growth is slowing. FedEx expects just 2.6% global growth versus their expected estimate of 2.9% at the beginning of the year. US growth is still at their 2012 expected rate of 2.2%. Obviously not great, but not a downgrade either.
- Their outlook disappointed. I wouldn’t be surprised to see this become a more pervasive trend as the earnings season goes on. The recent turbulence in China and Europe is going to favor easing up on expectations so don’t be surprised if corporate America isn’t offering the most optimistic outlooks into the future. The outlook is just too unclear so the prudent move for executives will be to set the bar low….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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15 Comments
No one is more global than Fedex so this should be alarming. I mean, it’s not yet the time to despair but this is the time to wait with plenty of cash. In another post there is a spot on the low inflation. Of course ! And it will get lower not higher in the next months. Yuan is down, Euro is down, oil is down US is still a net importer from each so where is inflation headed ? Down. And what the market think now ? The FED will act, so up but not too much because the S&P is already up. And what the FED will do ? For me not so much, the bare minimum to keep things floating. Go to the beach is the best option for now.
FDX is an “Economic Bellweather” –pay attention !
PAYX is another “Economic Bellweather” to watch–Earnings call June 28 –I think
Good report–CR thats another 1 in a row!
1 in a row! Nice. Does that mean my batting average is climbing from the depths of hell?
Your thoughts for today CR:
1)Your above the “Mendosa Line”–still in the Show
2)The “Home Run” record is not a risk
Myself–collecting dividends and a little price appreciation here and there
Mostly enjoying the BBQ and Beer down here on the Gulf Coast
Stopped by the “New” Federal Reserve building in Houston the other day
This is the largest complex I have ever seen for a Federal Reserve building
Check this out
http://designrelated.com/news/post_detail/8329/masonry-quotmasterpiecequot-or-mistake
Does anyone remember the “Code” to stop onswipe?–i know someone posted it
I turned onswipe off. Does it still show up? It shouldn’t….
Not showing up on my end….
if I were king of pragcap for a day… I’d add a better site search feature… for now I used site:pragcap.com onswipe to find the answer for AWF
http://pragcap.com/?onswipe_redirect=never
If I want to search for a commenter’s comment I also use site:pragcap.com and the commenter’s alias and whatever unique search term I remember from the comment i’m trying to find
Secondly, I’d love to be able to follow certain commenters – say we each have a profile that aggregates our comments
Thirdly – regardless of browser or computer I haven’t seen the “subscribe” to comments button in 2 or 3 months now. For me a reguler routine is to check the “Most Recent Comments” section to see if those I enjoy following have a truly recent comment.
But alas, I’m barely king of my own castle
And I realize this site is more a labor of love than profit… so don’t take the above as complaints, just something for your to-do list if you’re ever looking to improve the site
Thank You
” The current margins are certainly not sustainable.”
Not sure about that. Over the last 2 decades, wage share of GDP has dropped about 2% of GDP per decade. In the last decade, corporate cash flow is up about 2% of GDP. Also, private R&D (expense) can easily decline further (witness VC trends over the last decade). Corporate America has Joe the plumber to Sally the PhD down for the count and there doesn’t seem to be any prospective turn around.
Regarding margins Jeremy Grantham said “Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.” http://caps.fool.com/Blogs/mean-reversion-and-why-this/218695
I agree with Mr. Grantham and what’s gone badly wrong is we’ve become a Fascist state or as Mussolini preferred calling it a Corporatocracy. Though it’s not Fascism when the USA does it as our Ministry of Propaganda wants people to believe it’s capitalism.
“Fascism is capitalism in decay” – Vladimir Lenin.
Maybe not to that extreme, although corporate USA with politician’s in their pockets (sorry, I mean the politican’s arms-length super-pacs!) is becoming much more like Japan/Korea Inc. in the 70-80s and Britain from 1700-1900. Maybe it’s time to fight back and stop buying stuff from Apple, and other “good corporate citizens”.
If profit margins do not mean revert, there must be governmentally imposed barriers to entry, or an outside force preventing wages from rising. And on what timeframe must margins mean revert? It could take much longer than your attention span.
Another indication that recession is probably already here like Hussman and co. have been saying. Official one probably won’t be called for another quarter or two but I am sure BEA will revisit next year and declare that it started this quarter. Bigger question: Is the recent pullback factoring in a recession? I don’t think so but they are always compelling valuations if you bargain hunt enough. Not a bad time to raise some cash though as valuations look stretched even without taking a global recession into account.
Recession is already here? I don’t think so. “US growth is still at their 2012 expected rate of 2.2%. Obviously not great, but not a downgrade either. ” How can this info lead you to say recession is already here when the globe is growing at 2.6% and the US at 2.2% ? No question it is slowing gradually, but it has not fallen off a cliff, at least not yet.