FedEx Profit Warning Is No Surprise

Well, we can’t really say this was a shock. The European Union and eurozone are in recession, China is slowing down markedly, Brazil is barely growing and global manufacturing indices are sliding down a slippery slope, with the U.S. figure hitting a three-year low Tuesday.

So no wonder FedEx (NYSE:FDX), the global economic bellwether and second-largest delivery company after UPS (NYSE:UPS), took a hatchet to its fiscal first-quarter earnings forecast on Wednesday.

“Earnings during the quarter were lower than originally forecast, as weakness in the global economy constrained revenue growth at FedEx Express more than expected in the earlier guidance,” the company said in a statement.

Earnings for the quarter ended Aug. 31 are now targeted in a range of $1.37 to $1.43 a share, down from $1.46 a year ago. The company’s original forecast was for earnings of $1.45 to $1.60. Analysts, on average, were forecasting earnings of $1.56.

That’s a huge letdown — but it really was only a matter of time. Companies in the S&P 500 have been issuing more earnings warnings than upgrades at the fastest pace since late 2001, according to data from Thomson Reuters. FedEx just happens to be the latest and most ominous of alarm bells.

Indeed, a bit more than 100 companies have issued earnings guidance for the third quarter, and more than 80 have given projections below Wall Street estimates. That has analysts looking for something of an earnings recession in the current period.

Third-quarter earnings are forecast to decline 2.8%, according to data from FactSet. As recently as June 30, the Street was looking for profit growth of 2.1%.

And now FedEx, too, expects quarterly earnings to post a year-over-year decline for the first time since November 2009.

Alas, of course it is: The eurozone economy is expected to contract 0.4% this year. That’s not helping its biggest trading partner, China. The world’s second-largest national economy will likely grow just 8% this year, down sharply from 2011’s 9.2% growth — not to mention the torrid double-digit percentage rates of just a few years ago.

Meanwhile, the knock-on effects are hurting not only commodity-export developed nations like Australia, but emerging-market behemoths Brazil and India.

Heck, the whole world is getting sluggish. The International Monetary Fund chopped its forecast for global growth to 3.9% from 4.1% last spring.

And just three months ago, FedEx itself cut its outlook for U.S. GDP, to 2.2% from 2.3% for the year ending May 31. No wonder Sterne Agee analysts said FedEx’s guidance cut was “somewhat anticipated.”

If there is a bright spot to this profit warning, it’s that FedEx blamed lower revenue from its Express service — the premium business companies use to move things lickety-split. So a segment of FedEx’s business — one most sensitive to macroeconomic heat — is cooling, but demand has hardly collapsed. This is not a 2008-09 scenario.

Furthermore, the guidance cut will make it that much easier for FDX to beat Street estimates when it reports earnings in a couple weeks (something it has done for five quarters in a row.)

Finally, after swooning Wednesday, shares are off about 1% during the past three months and barely positive for the year-to-date. That has the valuation looking rather compelling. FDX’s forward price-to-earnings (P/E) ratio of 10 offers a 37% discount to its own five-year avearge, according to data from Thomson Reuters. Meanwhile, the Street’s median price target of $105 gives the stock an implied upside of more than 20% in the next 12 months or so.

A profit warning from a bellwether like FedEx is never fun — but it was hardly a bolt from the blue. And the latest sell-off could be a nice buying opportunity, not just heading into earnings, but over the long haul, as well.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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