by Dan Burrows | June 19, 2013 10:55 am
As the world’s largest air freight company by volume serving just about every imaginable industry, FedEx (FDX) is seen as a key global economic bellwether.
But sometimes even bellwethers tell us only what we already knew: Global growth stinks.
The company’s fiscal fourth-quarter earnings easily surpassed Wall Street’s average estimate Wednesday on a slight increase in revenue that matched forecasts. Lower jet fuel prices and cost cuts helped the bottom line — and FedEx said more cost cutting is on the way.
That the company beat estimates through lower expenses rather than robust revenue gains has become all too familiar. The sluggish global economy has been weighing on the shipper’s most lucrative division — the Express business — for more than a year now. Rather than pay a premium to ship packages overnight by plane, customers are opting for the slow boat to China.
Volume increased at the company’s lower-rate services like FedEx ground, but pricier, faster shipping options continued to show weakness. As a result, FedEx said it will further cut capacity in its Express service — targeting the U.S. and Asia routes — starting next month.
“FedEx Ground posted another strong year and FedEx Freight margins continued to improve,” CEO Fred Smith said in a media release. “These positive developments did not fully offset tepid economic growth and customer preference for less costly international shipping services.”
Although the company’s cost-reduction efforts are helping on the margin side of the equation — FedEx expected to generate an additional $1.7 billion in profit by slimming down the Express division even before announcing further retrenchment in the U.S. to Asia segment — more and more customers are opting for less expensive international services.
In other words, more of the same. Greater volumes of lower-rate services and cost cuts have to make up for declining volumes of premium-priced services. And that doesn’t appear to be changing anytime soon.
After all, China isn’t growing at a double-digit percent rate anymore. Heck, it will be lucky to hit 7.5% this year, and that has knock-on effects for trade throughout the region, from South Korea to Australia.
If FedEx is a bellwether, it’s been ringing the same old tune for a while. As CEO Fred Smith said, economic growth is tepid.
Europe is in recession. China — Europe’s biggest trading partner — is slowing markedly, with a shift away from heavy internal investment in things like infrastructure to keep the economy blasting along. That has commodity prices falling, hurting major emerging markets from Indonesia to Brazil.
Just last week the World Bank took a hatchet to its global growth forecasts for 2013. The world economy is now forecast to expand by just 2.2% in 2013, down from a prior projection of 2.4%. The developed world will grow 5.1%, down from a previous estimate of 5.5%, hurt by a 0.6% drop in Europe’s gross domestic product.
Emerging markets have been even more disappointing so far in 2013. The World Bank cuts its China growth projection to 7.7% from 8.4%, India to 5.7% from 6.1%, and Brazil to 2.9% from 3.4%.
No wonder the company guided to full-year adjusted earnings growth of 7% to 13%, which was well below analysts’ average estimate.
Still, from an investor’s standpoint, FedEx’s latest results were reasonably constructive. It’s a well-managed company that’s responding with alacrity to this reality .
Just as important, it has kept the market’s expectations in check. Indeed, shares trade at nearly a 13% discount to their own five-year average forward price-to-earnings ratio, suggesting the potential for any disappointments have been priced in.
FedEx is still growing, but that’s due mostly to management’s continual course corrections. Global demand sure isn’t doing it any favors.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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