FedEx and Texas Instruments: Two Warnings with Two Very Different Results

It’s just been raining guidance the past few days. Some companies are dropping it altogether, a few are reaffirming prior cuts, and many more are taking an axe to Q4 and 2009 estimates.

Two particularly noteworthy guidance changes came out after the bell Monday, as FedEx (FDX) and Texas Instruments [TI] (TXN) both set new (read: tentative) guidance for the current quarter and into 2009. Both “warnings,” if you will, are notable not because they are a surprise (is anyone left in the “surprised” camp?) but because they are both legitimate bellwethers in broad industry groups.

TI We Could Handle….

Texas Instruments was able to throw off the bad news, as shares rose 4.9% on Tuesday against a broad market down 2-3%. This is reminiscent of what Intel (INTC) was able to do following the slashing of its 2009 guidance one month ago. FedEx shares, meanwhile, went out and had its single worst day since 1987.

Why the discrepancy? For starters, TXN shares had been beaten down more, having fallen 51% this year compared with 34% for FedEx - and that’s after yesterday's 15% drop. Also, it was likely that the market was expecting TXN’s warning following previous announcements from both Intel and Advanced Micro Devices (AMD).

Some analysts keep predicting a bottom in semiconductors, because that’s what their handbooks tell them is supposed to lead out of a recession. The problem is we haven’t crossed the halfway point yet, and when we do, different industries will lead out then have led in the past. The old adage of financials leading us out is extremely unlikely to occur, while areas like materials & industrials may see earlier gains due to global stimulus package rollouts.

FedEx Gave the Market a Surprise

The news coming out of the delivery services giant extended a bit farther, as EPS guidance was updated through the end of the company’s Fiscal 2009 (ending 05/30/09). Horridly volatile fuel costs remain a huge “refractor” to earnings estimates, and are the reason why the new FY09 guidance is coming in such a high range of $3.50 to $4.75.

The prior estimate was for $5.23, or less than 5% below the EPS run-rate ($5.40) for the past four quarters, is yet another example of sell-side analysts simply not trying and just giving up until the company tells them. Using the official recession start date set by our friends at the NBER of December 2007, FedEx’s current fiscal year will have likely occurred completely within the window of recession. If that’s not a trough earnings period, then we’ll soon be witnessing the longest recession in history. Earnings should be bad; they should be terrible, frankly, especially for a company much more leveraged to the health of international economies than UPS (UPS).

Strength as Proxy Leads to Fear

As far as proxies go, FedEx is a pretty damn good one for commerce in general; as the company’s growth goes, so does the rate of general transaction, whether between retail & consumer, business-to-business, etc. FedEx has a big enough footprint to give us great insight into global economic activity, especially through its leverage to the express (air) delivery business.

This leads into why the stock responded so much worse than TXN on Tuesday, because FedEx has become quite a respected harbinger to many market watchers. For EPS to be drawn in further - in the face of the massive savings being booked on fuel surcharges right now - points to a demand drop-off of epic proportions.

With the lag in fuel surcharges of about three months, FedEx has been banking huge savings on a 59% drop in U.S. Gulf jet fuel in the past quarter. This temporary “fuel stipend” is why FedEx was able to pre-announce Q2 earnings (ending 11/30) of $1.58. However, adding the $1.58 EPS to Q1 earnings of $1.23 comes to $2.81 per share, leaving less than $1 of EPS between here and the low end of estimates for the full year, with two quarters left to go.

Stock Performance Has Been a Leading Indicator…So Far

One thing to note about FDX shares is that they actually topped out much earlier than the S&P 500, by just short of eight months to be exact. While FDX shares hit an all-time high of $120.97 on 2/23/07, the S&P didn’t top out until 10/12/07. FedEx’s outlook began to sour as soon as crude began its 2007 march into the $100s, and the much lower prices today are certainly a boost. However, international package volumes were already trending below zero growth, and that’s looking out a window into July and August, which compared to the current situation, were glorious months for demand.

As to the future, I find it impossible to predict when the rest of the world will recover; trying to estimate activity in the U.S. is difficult enough. This makes me an avoider of FDX shares, with an eye on UPS as they pick up the majority of DHL’s roughly 4% market share.

Parting Thoughts

Across the board, if management has reiterated at the time of the Q3 earnings release, or as recently as a month ago, nothing is safe. That being said, things are still the way they ought to be. We’ve shaved over 40% of the major indexes this year, a year when nominal earnings growth will be still registered for much of the S&P 500 (ex-financials, of course). We’re ready for EPS estimates to come way down, and we’re ready for the trough valuation process to kick off. If FedEx is indeed in a trough year, then a valuation of 15-16x 2009 estimates (using the midpoint of range), is quite fair, and could represent a bottom.

If you’re a believer that international growth will rebound in 2009, then FedEx is a good way to play it. I’m more wary, and think that UPS - with a similar valuation but better dividend - will continue to outperform.

Disclosure: Author does not hold positions in the companies mentioned.