Trade Slowdowns Force FedEx to Cut Guidance
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FedEx (NYSE: FDX) reduced its forecast for the fiscal year 2013 due to the weakening global economic environment in which earnings could fall by 6% year over year. The world’s largest air shipper is worried that its customers are shifting towards cheaper and slower shipping routes. The selling prices of products from auto parts to flowers continue to fall, which is forcing vendors to switch to sea carriers so that they can maintain their profit margins. For the current year ending May 31, the company has reduced its profit guidance from $6.90 - $7.40 per share to $6.20 - $6.60 per share. Following the downward revision, the company’s shares fell 6.4%.
What is even more alarming about this trend is that analysts expect it to be permanent, which is bad news for FedEx and UPS (NYSE: UPS). Like FedEx, UPS has also revised down its profit outlook from $4.75 - $5.00 per share to $4.50 - $4.70 per share, citing a slow US economy and uncertainties associated with fiscal policy. And it looks like high energy prices are creating a shift in consumer and supply chain habits to find better ways than air freight.
So FedEx is finding that, especially in the U.S., that it can’t outrun the twin nightmares of structurally rising oil prices eating into its margins and currency debasement eating into the wallets of its customers. Moreover, in the grander sense, this need to save money will drive even more regional and local production. Technologies like the 2nd generation MakerBot points towards a future of small, on-demand production that will remove the need for much of the FedEx’s business.
For the quarter ending Aug. 31, FedEx’s revenues fell sequentially by 2% but rose year over year by 2.6% to $10.8 billion, while profits slipped 16.5% sequentially and 1% year over year to $458 million. The shift was also evident in FedEx’s operating income of the ‘Express’ segment, which declined 26% sequentially and 28% year over year to $207 million, while the ‘Freight’ operating income increased 11% sequentially and 114% year over year to $90 million. But because Freight is the smallest segment of FedEx’s business, that is a real problem to the medium-term bottom line. For the year ending May 31, its capital expenditure on Express, Ground, and Freight segments was $2.7 billion, $536 million and $340 million respectively.
Moreover, a growing number of clients have never and do not plan on using over-night services. Demand for express is falling, within and outside the US, and FedEx has admitted it is not prepared to meet this change. Therefore, management has called for an investors and lenders meeting in the second week of October to discuss these issues. Some significant changes to the express delivery budget are likely to happen. The company has already implemented a cost cutting program with this in mind.
There is also a threat from the increasing dispute between the US and China at the WTO. The brunt of any possible trade war will be borne by UPS and FedEx, even though both companies don’t expect much more than bluster. But, trade wars beget hot wars and it is only a matter of time. FedEx would do well to listen to its own guidance on China. A full-blown recession in China would result in some kind of cross-border conflict, because otherwise there is likely to be a domestic conflict. Both FedEx and UPS have invested heavily to build the Chinese export infrastructure and were recently given the go-ahead to launch local parcel services.
UPS is looking to acquire Amsterdam-based TNT Express for $6.8 billion, which can boost UPS’s revenues from intra-Europe trade. However, due to its exposure to a multi-employer pension plan (MPP), expensive acquisition, large amounts of dividends ($2 billion last year) and a $2.2 billion capital expenditure plan, this kind of non-organic growth can erode a company’s balance sheet very quickly.
So, while UPS should continue to maintain strong cash flows due to its dominance in ground traffic, it could become a value trap if the TNT acquisition reflects a struggling Europe. Even though in the long-run the Euro-zone is likely to hang together, if not add more members, it will not be without a lot more pain and suffering; and that means pain and suffering for UPS.
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