Global Macro Woes Ground FedEx (FDX)
FedEx (FDX), which is considered a bellwether of the health of the global economy reported third quarter earnings that missed analyst estimates, raising concerns that the economy is actually weaker than the stock market would have investors believe. The second largest package delivery company in the world reported earnings of $1.23 per share, or $361 million, a 31% decline from the prior year quarter. This missed the consensus estimate of $1.38 per share.
Revenue rose 4% to $11 billion, topping the analyst estimate of $10.85 billion, but international revenues came in $100 million that it had previously forecast. Daily Chart
FedEx CEO Fred Smith attributed its lackluster bottom line to "continued weakness in international air freight markets, pressure on yields due to industry overcapacity and customers selecting less expensive and slower transit services." Weakness in China, slumping commodity prices and ongoing problems in Europe all contributed to FedEx's profit decline. FedEx had previously relied on its higher margin international sales to offset weaker profits at its lower margin domestic operations. To scale back its operations, FedEx announced that it will decrease freight capacity to Asia on April, and introduce new cost reduction plans. The company intends to ground older aircraft, and spend $450 million to $550 million on a voluntary buyout to reduce the size of its workforce. It also intends to divert lower margin shipments to "lower cost networks." The company had set a target to cut $1.7 billion in annual costs by 2016, and to reduce 10% of its workforce by May 2014. Lastly, the company lowered its capital spending plan from $3.6 billion to $3.9 billion. Looking forward, things don't look much better for the current quarter. FedEx expects earnings to come in as low as $1.90 to $2.10 per share, down from the low end of $1.99 it reported a year earlier. Analysts are expecting fourth quarter earnings of $2.07, which raises the bar high for FedEx. Full year earnings are forecast between $6.00 and $6.20, below the average forecast of $6.35. For investors, a major concern is FedEx's operating margin, which has dropped 6.6% over the past twelve months. Customers, both individual and corporate ones, could be switching over to slower, lower margin delivery options to save money. Both ends have been adversely impacted by recent payroll tax hikes and regulatory changes in the United States. FedEx has made a name for itself in higher-margin overnight deliveries, which now appear to be in a decline. In terms of sales volume FedEx grew strongly internationally, but at much lower margins that it desired. "Our planes coming out of Asia were full - full of the wrong type of product," stated David Bronczek, CEO of the company's Express business. However, some analysts see a bottom forming. Cowen Securities analyst Helane Becker noted that the air freight business continues to "bounce along a bottom," but the earnings should deteriorate much further for the company's Express unit. Shares of FedEx currently trade at 12.92 times forward earnings with a 5-year PEG ratio of 1.26. Other News About FDX FedEx Earnings: Monster Miss is an Early Warning Sign for Multinationals
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Published on Mar 26, 2013
By Leo Sun