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….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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