Oct 26, 2012
FedEx Corp (NYSE:$FDX) reduced its forecast for the fiscal year 2013 due to the weakening global economic environment in which earnings could fall by 6% YoY. The world’s largest air shipper is worried as 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 31st, the company has reduced its profit guidance from $6.90 – $7.40 per share to $6.20 – $6.60 per share. Following the downward revision, the company’s shares fell 6.4% in the following week.
What is even more alarming about this trend is that analysts expect it to be permanent, which is bad news for FedEx and UPS (NYSE:$UPS). Like FedEx, UPS has also revised down its profit outlook from $4.75 – $5.00 per share to $4.50 – $4.70 per share citing slowing US economies and uncertainties associated with the fiscal policy. And it looks like high energy prices are pushing a shift in consumer and supply chain habits to find better ways than air freight.
So, while Fedex, along with DHL, pioneered air freight to fill in the gaps left by government postal services it is finding that, especially in the U.S., that it can’t outrun the twin nightmares of structurally rising oil prices eating into its margins and currency debasement eating into the margins of their customers. Moreover, in the grander sense, this need to conserve energy will drive even more regional and local production.
Technologies like the 2nd generation MakerBot points towards a future of small run, on demand production which will obviate the need for much of the FedEx’s business. In addition the energy problem will likely not be solved in any timely manner because of entrenched political interests keeping certain technologies off the market for years. When I look at something as potentially disruptive as the Synergy aircraft I see something that Boeing (NYSE:$BA) and the F.A.A. will never allow in the air because it represents a fundamental change to aviation and the power structure that exists in the control of the industry.
For the quarter ending 31st August 2012, FDX’s revenues fell sequentially by 2% but rose YoY by 2.6% to $10.8 billion while profits slipped 16.5% sequentially and 1% YoY to $458 million. The shift was also evident in FDX’s operating income of the ‘Express’ segment which declined 26% sequentially and 28% YoY to $207 million while the ‘Freight’ operating income increased 11% sequentially and 114% YoY 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, 2012, its capital expenditure on Express,
Ground and Freight segments combined was $2.7 billion, $536 million and $340 million respectively.
Moreover, the trend is that a growing number of clients have never and do not plan on using over-night services. Demand for express is falling, within and outside US, but for other services, it is rising. FedEx has admitted it is not prepared to meet this change. Therefore, the 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’s 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 US and China at the WTO. The brunt of any possible trade war will be borne by UPS and FedEx, even though the companies both 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 a 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 multiemployer pension plan (MPP), expensive acquisition, large amounts of dividends ($2 billion last year) and $2.2 billion capital expenditure plan, and this kind of non-organic growth is the kind that can erode a company’s balance sheet very quickly.
So, while UPS should continue to maintain strong cash flows due to its dominance in ground traffic, it could become a value trap if the TNT acquisition reflects a struggling Europe. Even though in the long-run the Euro-zone is likely to hang together, if not add more members, it will not be without a lot more pain and suffering, even in the strong northern European economies.
Since the start of FDX’s fiscal year 2012/13 from 1st June, UPS and FDX have fallen by 4% and 5.3% respectively. This has put them in opposition to the SPDR S&P 500 ETF (AMEX:$SPY) and SPDR Dow Jones Industrial Average ETF (AMEX:$DIA) have risen 10.9% and 9.5% respectively. Is this Dow theory rearing its ugly head; weak transports belying a buoyant general market? If so, then these two companies along with chip giant Intel (NASDAQ:$INTC) and construction bellwether Caterpillar (NYSE:$CAT) first pulling then downgrading their 4th quarter guidance are all screaming that despite the money printing there is a bleak holiday season and 2013 on the horizon.