What Does This Shipping Company's Earnings Say About the Global Economy?
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Despite apparent investor optimism, with major indices challenging multi-year highs, there are very few signals the global economy is improving. In fact, things seem to be getting worse. The markets, usually so receptive to mass capital injections, gave quite a dampened response to Bernanke’s last announcement of further Fed easing. Last week, I wrote about Intel’s revenue warning as a sign the tech sector may be running into a lot of trouble. Today I’d like to discuss FedEx’s (NYSE: FDX) most recent earnings report, as its contents do not have much good to say about the state of the global economy.
With a market cap of 28.5 billion dollars, FedEx is the world’s second largest transportation company. FedEx Holding’s operations are divided into the segments FedEx Express, FedEx Ground, FedEx Freight and FedEx Corporate Services, whose responsibilities include sales, marketing and communication. Tuesday morning, FedEx announced earnings and revenue that both slightly beat muted expectations, but cut their guidance for 2013. This news sent the stock down before the bell, as the firm cited an increasingly bleak macroeconomic backdrop as a continuing drain on future profits.
The firm cut its full year EPS outlook from a maximum $7.40 to $6.60, most notably as a result of slowing demand in its more expensive priority services. Due to the global economic slowdown, many clients are instead opting for cheaper methods of transporting their goods, which led the Ground division to perform better in the last quarter. However, due to the huge number of products shipped by FedEx and the range of markets it operates in, the firm can be considered a bellwether for the situation of the global economy. A decrease in priority shipping spending thus says a lot about the financial position of its clients, which include states, corporations and private consumers.
Unsurprisingly FedEx’ warning also knocked down shares of its main competitor, United Parcel Services (NYSE: UPS). UPS, with a market cap of 71.1 billion, is the world’s number one provider of package transportation services, and was down about 1% before the bell today. Based on fundamental valuation, FedEx is a bit cheaper at the moment. FedEx trades at about 14.1x earnings compared to UPS’ 18.5x, and also the price to book of 1.7 is far lower than UPS’ exorbitant 8.9. UPS furthermore disappointed the market with misses in both Q1 and Q2 of this year.
The two firms suffer from similar problems, many of which at the moment have to do with a slowdown in business package spending. Both firms are very sensitive to business spending which isn’t very profitable at the moment. Additionally, because they operate in the transportation sector, they are also vulnerable to increases in fuel costs, and due to the wide range of their markets can also suffer from negative Forex translation.
All is not gloom and doom however, as FedEx and UPS seem to have some potential to grow especially in China. Both companies were recently granted the ability to conduct business without regional partners, which could mean a huge increase in profits. FedEx expects the shipping market in China to grow by 400% by 2020, although both firms remain hampered by the attempts of the Chinese government to promote local competitors.
In summary, FedEx earnings reports have a lot to say about the world economy, and right now they’re not saying anything encouraging. Although earnings and revenue beat, the reduced expectations for the future should caution investors banking hard on global recovery. While FedEx is available at a discount to its main competitor UPS at the moment, one should think twice before committing funds to the industry at the moment.
DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.