Let me start with the good news first. FedEx Corp. (FDX), the world's second largest package company, beat first-quarter earnings forecast on Tuesday. For the quarter ended August 31, 2012, the Memphis, Tennessee-based company reported earnings $459 million, or $1.45 per share, beating consensus forecast of $1.40 per share.
The earnings beat is unfortunately the only thing to cheer about. FDX's first-quarter results from its Express segment as well as its outlook are disappointing, to say the least.
FedEx had warned earlier this month that weakness in the global economy hurt revenue growth at FedEx Express during the first quarter. The Express segment is FDX's largest in terms of sales. In the first quarter, the segment's operating margin dropped to 3.1%, while operating income plunged 28%.
The Express segment was hurt by a drop in U.S. domestic package volumes, and the demand shift towards lower-yielding international services.
The weakening global economy has forced companies to slash the use of faster and costlier shipments. What is worrying is the weakness in the global economy is not going away anytime soon.
In Europe, the move from the European Central Bank (ECB) to buy bonds of struggling euro zone economies bought some relief. The move has been effective in bringing down borrowing costs for Spain and Italy, but the euro zone crisis is far from over. There is increasing talk of Spain asking for a bailout. Even if the crisis is contained in the euro zone, the big question is where growth will come from. Until growth issues are addressed euro zone will continue to weigh down the global economy.
China, the world's fastest growing major economy and perhaps the engine of global economic growth, is an even bigger worry. Recent economic data from China indicates that the world's second largest economy is seeing a sharp slowdown. While part of the slowdown can be attributed to policymakers' efforts to cool down the economy to contain inflation, the weakness in the euro zone and U.S., China's biggest export markets, has hurt growth rates significantly. What has been surprising is that Chinese policymakers have been reluctant to implement aggressive stimulus measures like they did in 2009 to boost economic growth.
Finally, U.S. economic growth is likely to be anemic this year. QE3, which I believe was a correct decision by the Federal Reserve, has given some hopes. But as I said in my previous post, fiscal cliff is a major concern and if lawmakers in Washington D.C. do not act on the issue, the Fed's efforts will be neutralized. Also the effects of QE3 will take some time to have an impact on the real economy.
With global economic outlook uncertain, it is no surprise that FedEx yesterday slashed its earnings outlook for the full fiscal year. FDX now expects fiscal 2013 earnings to be between $6.20 per share and $6.60 per share, which is down from previous forecast of $6.90 per share to $7.40 per share.
For the second quarter of fiscal year 2013, FDX expects earnings to be between $1.30 per share and $1.45 per share, which is significantly below the $1.57 per share FDX reported in the second quarter of fiscal 2012. Second-quarter earnings forecast are also significantly below the consensus estimate of $1.67 per share.
FedEx's rival United Parcel Service Inc. (UPS) has also lowered its profit outlook for the full year.
The big worry for FDX is the Express segment. The segment has been hit the hardest by the global economic slowdown, and it is also FDX's largest segment in terms of sales. Launch of new products from Apple Inc. (AAPL) and Microsoft Corp. (MSFT) may help the company, but they are not likely to offset the negative impact from a weak global economy. Exports and trade have gone down at a faster rate than GDP has, said FedEx CEO Fred Smith during a conference call yesterday.
FDX plans to implement cost cutting measures in the Express segment. FDX has been cutting costs over the past year, but the company is yet to reap any benefits from those measures. So, any measures the company takes in future will have to be drastic. That may help FDX in improving its margin. But the lack of demand will still hurt the company.
If you are betting on FedEx right now, you are betting on significant and quick recovery in the global economy. And in the present environment, I don't expect a recovery anytime soon. Just to emphasize my point, FDX shares gained more than 103% between January 2003 and August 2007, the period when the global economy was growing at a brisk pace thanks to the credit fueled boom. In the same period, the S&P 500 gained more than 65%. But, between September 2007 and March 2009, when the global economy sank, FDX shares slumped 60.6%. So there you see how much of an impact the global economy has on FDX.
While I do not expect the global economy to slump like it did post the U.S. housing market collapse, I do not expect a quick recovery either. And with FDX's fortune tied so closely to the state of the global economy, I am not putting my money on the company.