FedEx's (NYSE:FDX) stock has been a significant underperformer since the start of the year largely on concerns that more customers are shipping packages using inexpensive/low profit ground services from the company, rather than opting for high price/high profit air shipping. The concern among many investors was that this would not be a temporary phenomenon that reversed as the economy gets stronger, but rather that this was a permanent secular shift towards expense control by FedEx's clients.
Results from two small companies in the last month throw cold water on this thesis though. In particular, results from Expeditors International (NASDAQ:EXPD) and Atlas Air Worldwide (NASDAQ:AAWW) suggest the gloom may be over stated for FDX. (See my article on AAWW and why it is severely undervalued here.)
Let's start by looking at EXPD and their recent results. EXPD is a freight forwarder, customs broker, and logistics company. Mainly they help manufacturers and distributors move products from one country to another. While the company does business both via ocean and air, for the purpose of evaluating FedEx, air freight is the primary area of interest. Earlier this year, the markets expressed concern over EXPDs performance in the air freight business in particular, sending shares sharply lower. But when EXPD reported at the start of May, things looked much brighter. EXPD CEO Peter Rose said at the time "It was great to see some sustained traction in year-over-year air freight tonnage growth." Mr. Rose then went on to say that he and the rest of the EXPD leadership team feel much better about the global economy now, then they did 3 months ago, or one year ago. This is significant for FDX in that if EXPD is seeing increased shipments and volume for air freight, then chances are that FDX will as well.
EXPD gave weight to their views both with their earnings performance and with their 7% dividend increase the next day. Indeed, following 6 quarters of consecutive falls in Asian air freight volumes for EXPD, the last two quarters have seen flat or increased Asia air volumes. While it's certainly possible that FDX will underperform, investors can infer from EXPDs results that the global air shipping industry may be getting better, or at least not getting any worse.
Atlas Air provides air transportation services in a variety of capacities including moving air freight from place to place. While the firm is small, they do business all over the world, which makes them a good proxy for global air traffic. When planes get used less, lease/charter rates for planes fall and AAWW feels this effect on their bottom line. Concerns over diminished air traffic around the world and the effects of the sequester hit AAWW's stock earlier this year. But when the company reported earnings earlier this month, a lot of those concerns proved unfounded.
AAWW beat analyst's estimates handily and raised their EPS guidance for the year. What's more, the company reported that demand for their aircraft is strong, and that they expect a pickup in volumes in the second half of the year. This anticipation of increased activity in 2H 2013 is consistent with commentary from numerous CEOs, particularly those at large industrial companies. Further, new product cycles from (NASDAQ:AAPL), (NYSE:NOK), and Samsung later this year and early next year should provide an even bigger boost to air volumes as the year winds on.
All in all, if AAWW and EXPD are to be believed, the air transport business may not be in as bad a shape as everyone assumes. Historically, AAWW and EXPD have been good predictors of FDX earnings with a earnings beat/miss correlation of about 0.72 over the last 3 years (see my blog here for more details).
Either way, investors will undoubtedly want to keep an eye on FDX earnings next month, and they should consider using any weakness in share prices between now and then as a buying opportunity.