It's a Fed day! I have been reading that all morning, but, really, what market commentators should be noting is that it is a "FedEx day." FedEx (FDX) shares have fallen more than 5% this morning, as the company's guidance for EPS for Fiscal 2020 (the 12 month period ending March 2020) of $15.10 to $15.90 disappointed a Street that had set a consensus of $15.97.
FedEx should be considered a bellwether for the global economy, but it seems that investors only focus on the company once every three months, which is regrettable in light of the intense investor focus on the FAANG tech titans. Apple (AAPL) sells a product that is far too expensive for the average Chinese consumer and Amazon (AMZN) does not even own "Amazon.cn," although it does transact business through that site. The main sites of Netflix (NFLX) , Facebook (FB) and Alphabet's (GOOGL) Google are blocked by the Chinese government.
So, if you want to know about the state of the Chinese economy and its impact on the global economy, you listen to Fred Smith and FedEx. Here are several quotes from Mr. Smith and his management team's presentation on the analyst conference call last night:
Since our last earnings call, we have seen the overall China economy slow down further, and this has impacted other Asian economies.
Asia volume weakness, which we experienced during peak season, deepened post Chinese New Year.
(In answer to an analyst question) You could tell me, are we going to get a trade deal done with China and is Brexit going to come out good?
And so, we knew that the slowdown coming in Q1, it was just - it was the pre-Chinese New Year. The peak was very muted, and the post-Chinese New Year was very, very soft.
In case you missed that collective sledgehammer, China has been weak for FedEx. Management also noted a slowing in the U.S and pronounced weakness in Europe. That weakness in Europe is exacerbated by FedEx's larger presence there owing to the $4.8 billion acquisition of Dutch delivery services company TNT in May 2016. Mr Smith noted that TNT is still recovering from the Notpetya virus attack on June 27th, 2016, an incident that Mr. Smith noted "had TNT been a standalone company at that time, it would have been bankrupt(ed.) " Ouch.
So, FedEx results are a flashing red signal on the health of the global economy in the midst of the S&P 500's 28-year-best >12% gain to start 2019.
Another pressing concern for FedEx is the margin compression in its U.S. business, which seems to be to be driven more by secular changes in the freight business than cyclical economic factors. The background is simple. If you are a corporate IT manager and want a server delivered to New York from California there is no company on Earth better than FedEx at that task. If you are consumer and want a pair of running shoes delivered from Tennessee to your home in North Carolina (I just did this,) any company can do that.
As FedEx management noted once again on last night's call, FedEx simply cannot charge as much for the smaller packages generated by consumer e-commerce purchases as it can for larger, corporate deliveries or guaranteed overnight deliveries of important documents (yes, there is email now.) Also, those deliveries tend to happen over shorter distances, as companies like Amazon are opening new warehouses at a frenetic pace to be closer to their end consumer.
So, in industry jargon, that means a lower "yield" for FedEx in both the FedEx Express and FedEx Ground businesses. A quick check of the transcript shows FedEx management used the word yield 14 times on last night's all. I believe that yield pressure will offset management's efforts to trim costs via layoffs and other means, and that FedEx is going to face declining margins - apart from seasonality in its core business - for the next few years.
So, that's a tough one for the market to digest. A weaker macro picture combined with micro pressures. No matter what, Powell and his merry men and women announce this afternoon, investors should be watching for more "FedEx moments" as the calendar turns to April and the quarterly earnings season commences in earnest.