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 What does FedEx's bellwether earnings indicate about the economy? FedEx Raises Red Flags About Global Economy FedEx earnings indicate that all is not well with the global economy. Other Stocks in the News Is Zumiez Ready to Zoom? Is this "action sports" retailer ready to rally? A Contrarian View of Amrica Mvil Does Carlos Slim's empire deserve a second look? Copyright 2013 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Mar 26, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

Posted in ...