Global recession!
That's the implication. The situation is this. FedEx (FDX) released on Thursday evening preliminary results for the firm's fiscal quarter, which ended August 31st. The firm did not release these earnings because they were doing so well that they could not wait to tell us.
The firm is considered a barometer for both US and global economic growth, due to the nature and scale of its business. They were warning shareholders. The quarter that will still be reported officially next week, will not come close to meeting expectations. The firm also took down projections for the current quarter, blaming "global volume softness" and adding that this softness "accelerated into the later part of the quarter.
FDX stock sold off more than 20% overnight, as direct competitor United Parcel Service (UPS) has also come under pressure. I have always felt (opinion alert) that UPS was better managed than FDX, and would love to hear something from UPS CEO Carol Tome, who is in Sarge's Top 10 CEOs, on what she is seeing exactly. If UPS has been similarly impacted, I would say that it's nearly "game over." UPS is not scheduled to report until October 25th.
Away from the big two in parcel delivery services, overnight pressure has reached XPO Logistics (XPO) as well as truckers such as JB Hunt (JBHT) and CH Robinson (CRH) .
Numbers
The FedEx press release shows some gnarly preliminary results for the fiscal first quarter. The firm posted adjusted EPS of $3.44 (GAAP EPS: $3.33) on revenue of $23.2B. The earnings per share numbers would be comparable to adjusted EPS of $4.37 and GAAP EPS of $4.09 for the year ago comp. Consensus view had been for $5.14. Ouch. Revenue, while good for 5% year over year growth, fell short of the $23.52B that Wall Street had been looking for.
Operating income dropped from $1.4B a year ago to $1.19B. The breakdown by business unit is as follows... FedEx Express saw Operating income drop from $567M to $174M despite an increase in revenue generation from $11B to $11.1B. FedEx Ground saw operating income increase slightly from $671M to $694M as revenue generation increased from $7.7B to $8.2B. FedEx Freight experienced an increase in operating income from $390M to $651M as revenue increased from $2.3B to $2.7B.
On Expenses
FedEx will attempt to mitigate the impact of demand reduction through a series of actions meant to cut expenses.
FedEX will...
- Reduce in flight frequencies, while temporarily parking some aircraft.
- Consolidate sort operations.
- Reduce Sunday operations for FedEx Ground.
- Cancel certain projects including those concerning network capacity.
- Defer hiring.
- Close over 90 FedEx Office locations.
- Close five corporate office facilities
Outlook
FedEx has been forced to withdraw its fiscal year 2023 guidance that was provided on June 23rd based on an expectation for an ongoing volatile operating environment. For the current quarter, the firm now expects to generate revenue of $23.5B to $24B. Wall Street was at $24.9B for that number. FedEx now sees adjusted EPS of $2.75 (GAAP EPS of $2.65). This is down "big time" from the $5.48 consensus view.
Anticipated capital spending for the full year has been revised down to $6.3B from $6.8B. The firm did add that it still expects to repurchase $1.5B worth of common stock for the full fiscal year including $1B worth during the second half.
Wall Street
I have found 10 sell-side analysts that are both rated at a minimum of four stars (out of five) by TipRanks and have opined on FDX since this news broke. After allowing for changes to be made, I see five "buy" or buy-equivalent ratings and five "hold" or hold-equivalent ratings. The average target price across the 10 is $216.50 with a high of $250 (Jordan Alliger of Goldman Sachs) and a low of $180 (Christian Wetherbee of Citigroup). Omitting the high and the low as outliers leaves us with an average target of $216.88 across the other eight. Not much of a change.
My Thoughts
FDX opened down significantly Friday morning, near a two year low. The firm claims that this is a demand problem. Were revenues really that poor? I don't think so. Profitability and projected profitability are a much greater problem than is the generation of business from my amateur vantage point.
Do I want to buy this dip? I can't speak for everyone, but... no. I do not think I want to do any more than trade FDX short-term. As for UPS? Maybe I do buy that more shallow dip. Why? Because like I told you above, UPS is better managed than FDX, and Carol Tome is a pro. So, yes, I would rather buy UPS at a 7% discount than FDX at a 20% discount. Truth is that I will likely be in both names at some point today. However, there's no chance in heck that I go into the closing bell wearing any FDX.
Oh, one more thing. Amazon (AMZN) does not use FedEx. If AMZN trades off to a greater degree than does the market in general, I may grab a few of those.
(UPS and AMZN are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)
