What Fedex’s Earnings Tell us About the State of the Global Economy
I know I am the only one who thinks this, but earnings season starts for me when FedEx reports their results. It’s always a few weeks before Alcoa and in my opinion, it’s infinitely more important and indicative of the state of the global economy (as well as the domestic economy).
Today’s report can be described as just okay. The highlight (or lowlight I guess) is the reduced guidance and negative outlook due to international economic weakness:
FedEx projects earnings to be an adjusted $1.90 to $2.10 per diluted share in the fourth quarter and an adjusted $6.00 to $6.20 per diluted share for fiscal 2013 before charges related to the company’s business realignment. Costs of the benefits provided under the voluntary buyout program will be recognized in the period that eligible employees accept their offers, predominantly in the fourth fiscal quarter. Including the third quarter costs, the company now expects the fiscal 2013 pretax cost of the voluntary buyout program to range from approximately $450 million to $550 million in cash expenditures, or $0.89 to $1.09 per diluted share, with some additional costs expected in fiscal 2014. Actual costs will depend on employee acceptance rates. Including the business realignment costs, earnings are expected to be $0.94 to $1.34 per diluted share in the fourth quarter and $4.91 to $5.31 per diluted share for fiscal 2013. This guidance assumes the current market outlook for fuel prices. The capital spending forecast for fiscal 2013 is now $3.6 billion, compared to $3.9 billion in the company’s previous forecast.
In last year’s fourth quarter, the company reported earnings of $1.99 per diluted share, excluding a $0.26 per diluted share non-cash aircraft impairment charge at FedEx Express. Including this charge, earnings were $1.73 per diluted share.
“Our lower-than-expected results for the quarter and reduced full-year earnings outlook were driven by third quarter international revenues declining approximately $100 million versus our guidance primarily due to accelerating customer preference for lower-yielding international services, lower rate per pound and weight per shipment,” said Alan B. Graf Jr., FedEx Corp. executive vice president and chief financial officer. “We expect these international revenue trends to continue. We have other actions under way beyond those already included in our profit improvement program. Some of these additional actions may involve temporarily or permanently grounding aircraft, which could result in asset impairment or other charges in future periods.”
Here’s some more commentary from the conference call:
“On the economic front, our forecast calls for modest growth in the global economy. Historic revisions and incoming data since our last earnings call led us to adjust our GDP and industrial production numbers. Our U.S. GDP growth forecast is 2% in calendar ’13 and 2.5% in calendar ’14. For industrial production, we expect growth of 3% in calendar ’13 and 3.5% in calendar ’14.
Housing and auto markets have shown improvement, e-commerce experienced mid-teen growth rates and we’ve seen some inventory restocking taking place in the near term. Our global GDP forecast calls for 2.3% growth in calendar ’13 and 3% in calendar ’14. The calendar ’13 outlook certainly remains uncertain due mainly to policy issues in the U.S., Europe and China.”
Domestic package shipments, which correlate well with real GDP in the USA, jumped back into positive territory at 1% which is historically consistent with sluggish RGDP of about 2%. All in all, it’s not great and it’s not terrible. It looks like muddle through is here to stay for now.
Chart via Orcam Investment Research:
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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6 Comments
Weird day for the market. FDX and Caterpillar report weaker than expected results and the market rallies on Fed expectations. Nothing matters except the Fed any more.
http://finance.yahoo.com/news/caterpillar-reports-slowdown-sales-194059342.html
Cullen, one thing I have problems with you on is looking at derivative data. Companies like Fedex are very clear real time (and trailing) indicators of the economy. (Applied Materials is a classic perhaps 2nd derivative indicator, if foundries business is steady but doesn’t grow (no new tools needed), Applied Mat’s business goes to zero (except for replacement).
FedEx is very real time data, and so it correlates very well with other measures like GDP. But it has no predictive capability. It’s a nearly real time measurement of current business activity. Trends are important, but I don’t see a really significant trend in FedEx either way, just like I don’ see a real trend in the US or world economy.
I do see a trend from FedEx. “reduced guidance and negative outlook due to international economic weakness”. Global growth has been slowing, and more importantly, it continues to slow, based on FedEx’s reduced guidance. The huge rally in equities since mid-November is out of synch with a gradually slowing global economy. One of these two areas has to change its trend fairly soon: either the equity market, or else global growth must turn and start to pick up speed.
Oracle out with weak earnings also….
Actually recessions or periods of economic weakness usually start with a market rally. I’m not sure why and I dont want to go all conspiracy theory on it, but whenever something goes parabolic, enjoy the ride but just like musical chairs have an exit strategy.
Considering FedEx is buying back stock, as opposed to investing in the company at a time of historically low borrowing rates, I believe this earnings report portends some trouble. They say they are expecting growth of 3% for 2013, but their hesitation to fully invest in new planes and facilities tell me they are expecting sub-2%.