the Fedex 2Q11 (ended November 30th) results

the results

Yesterday I listened to the FDX 2Q11 earnings conference call, which was held before the market opened in New York last Thursday.

FDX reported earnings of $1.16 a share on revenues of $9.63 billion.  The revenues were up by 12% year on year, the eps less than half that.  Earnings per share also just barely hit the bottom of the range of $1.15 – $1.35 that FDX guided analysts to when it reported 1Q11 results on September 16th.

Despite the close call, FDX raised its guidance for the full fiscal year from a range of $4.80 – $5.25 a share to a new range of $5.00 – $5.30.

The company did caution that its third fiscal quarter is always vulnerable to bad weather, of which the midsection of the US has already had plenty so far this month.  So it’s not yet clear what the quarterly breakout of the earnings will be.


The International Priority (IP) business, notably deliveries from Asia to the US, continued to grow rapidly, with revenues expanding by 14% over a year ago.  Notably, the domestic parts of the FDX distribution chain grew at about the same rate, and benefitted from improved operating efficiencies.

So what went wrong?

1.  After what was reported as only three hours of deliberation, a jury in Indianapolis awarded now-defunct airline ATA $65.9 million in its suit against FDX that it wrongfully terminated a long-term contract with ATA to transport US troops.  A reserve for this judgment–FDX said nothing on the call about a possible appeal–clipped about $.15 from eps.  That’s also the main reason the IP business had flat year-on-year operating income.

2.  FDX overestimated the strength of the IP business during the second quarter.  It extrapolated the frantic rate of shipment growth of the spring and summer into the fall.  But that didn’t happen.  Revenues in the IP segment grew by 23% y-o-y in 1Q2011 after an almost 30% gain in 4Q10–but decelerated to 14% growth in 2Q11.  (True, comparisons are affected by the fact that FDX’s business really began to pick up from recession lows in the second quarter of last fiscal year.  But FDX guidance still anticipated better than what it got.)

3.  FDX is now projecting a better full year than it was three months ago.  I’ll get to this in a minute.  Because of this, it is also projecting bigger bonus payments to employees than it was.  Therefore, it made a higher provision for bonuses in 2Q, and presumably also had to make a catch-up accrual for 1Q.  FDX mentioned this as a factor but gave no further details.

why the slowdown in the international business?

In ordering from suppliers, a merchant faces two complementary inventory risks:

–he can order what he is confident he can sell plus some more, and risk the expense of holding excess inventory for longer than he wants or selling it at clearance prices, or

–he can order only what he knows for sure will sell–or maybe less, and risk losing business as customers come into the store and find the shelves bare.

FDX wasn’t 100% clear on the point, but it seems to believe that retailers got cold feet as they planned for the holiday selling season.  They collectively made the cautious decision that the risk of being out of stock was much more acceptable than the risk of having excess inventories.  So they slowed down the pace of their new orders from Asia.

They are now finding out, too late to do anything about it, that customers are in a much better spending mood than anticipated.  As a result, store inventories will be severely depleted by the end of December.  This means, in FDX’s view (I think they’re right) that there’ll be a mad rush to restock early in the new year.  That will be very good for FDX.

In addition, FDX clearly believes that world economic growth is beginning to gain momentum and will continue to do so for at least this year and next.

my thoughts

I haven’t done enough work on FDX to have an opinion about it as a stock.  Clearly, earnings are going to improve, both as the global economy expands and as the costs of resuming normal operations–restoring pay and benefit cuts for employees and reactivating planes mothballed in the desert during the recession–now being charges against income–fade from the financials over the next couple of quarters.  To me, the real question is how much of that good news is already reflected in today’s stock price.

Be that as it may, FDX is a large, sophisticated company.  Because of the business it’s in, it has unusually good insight into the workings of the world economy.  It sees, directly or indirectly, manufacturers’ production plans and retailers sales experience.  And it must already have a good feel for the tone of business for the next several months.  I happen to think the company’s view of world economic growth is correct.  But, unlike my guesses, theirs is based on a wealth of commercial data that few other entities have.  So I think FDX is evidence that it’s still right to be bullish.



FedEx’s first fiscal 2011 quarter (ended August 31st): stronger global growth

the FDX report

Last Thursday FDX reported strong first quarter fiscal 2011 results.  Earnings per share were $1.02 for the three months, up 108% from the $.58 tallied in the comparable three months of fiscal 2010.

FedEx also announced plans to address the loss-making freight segment by merging FedEx Freight with FedEx National LTL (less than truckload) commercial shipping operations into one unit next January.  Despite terminal closings and layoffs, FDX expects to gain market share–and profits–with the move.

FDX upped full-year earnings per share guidance from the previous range of $4.60 – $5.20 to $4.65 – $5.25, ex merger related expenses of $150-$200 million.

By line of business, operating earnings for the quarter were as follows:

FedEx Express     $357 million vs. $104 million in the year-ago quarter

FedEx Ground     $287 million vs. $209 million

FedEx Freight     -$16 million vs. $2 million.

FedEx as bellwether

Transport has a high-beta relationship with overall economic growth.  FDX’s strong earnings performance is a good indicator that economies, around the world but especially in Asia, are continuing to expand.

Express, primarily an international business, saw international package volume rise by 19% and weight by 41%, producing revenue growth of 20%, year over year.  Small, high value packages from Asia (like cellphones or iPads) are a particular strength.  So much so that FedEx has added two scheduled daily flights from Asia over the past few months, bringing the FDX total to 12.  The company will soon boost capacity again as it replaces older airplanes with new purchases.  FDX’s planes are booked through the year-end holiday season.  Load factors are the highest they’ve been in ten years.  Customers are upgrading to premium service.

Revenues for Ground, a US-centric business, were up 13% on a 7% increase in package volume.   The volume boost comes almost completely from market share gains.  In FDX’s view, the US economy is showing “slow but sustained” growth.  The shape of the recovery is “normal.”

The US LTL industry suffers from chronic overcapacity.  Too many trucks chasing too few goods–plus contracts signed when things looked bleakest last year–are the two reasons for FDX’s poor showing in its domestic Freight business.  The company thinks it sees a remedy by using advanced software to more or less replicate the structure of its international air business on the ground at home.   Hence the merger of Freight and National LTL.

The ongoing recovery of world economies is being led by the industrial sector, and by China, India, Mexico and Brazil.  From the remarks FDX management made in its conference call, it seems to me that FDX thinks the securities analysts who follow it–and by extension, American investors generally–just don’t “get” how big these countries are.  Presumably, the international business will be a major topic of the firm’s annual analyst day in Memphis in a couple of weeks.  The main idea will likely be that the developing world is growing like a weed.  In 1980, the developed world made up two-thirds of the global economy and was twice the size of the developing nations.  Within two or three years, however, the developing world will make up over 50% of global output, more than the developed countries’ GDP.

FDX as a stock

I know what the issues are but I don’t know FDX well enough to have an opinion.

1.  At present, manufacturers are controlling the distribution of products by keeping inventories centralized and shipping them at the last minute by air.  The other alternative would be to put the output on boats and truck them to their final destination from the destination port.  The former means higher transport costs but creates extra flexibility for firms to avoid sending products to places where inventories are already high and sales are unexpectedly slow.

The current situation plays to FDX’s strengths and is a financial bonanza for it.  The company strongly believes customers are not reacting to worries about an uncertain world, but are rather taking advantage of supply chain management software advances that save them money through more precise inventory control.

Sounds reasonable to be, but I don’t know.  Not good for FDX if manufacturers go back to using boats.

2.  The domestic freight business has low barriers to entry.  FDX is trying to create one by introducing advanced software to control its commercial truck freight shipments in the same way it does internationally with air.  Its marketing research says customers want the pricing flexibility the new system will provide–and that therefore FDX will be able to make more (or at least some) money with less invested capital.

I’m big on “work smarter, not harder,” so again this sounds good.  But we still have to see.

3.  Fiscal 2011 is a transition year, filled with all sorts of one-time costs.  There are:

–maintenance for previously mothballed planes now being put back in service

–capital expenditure for new planes to service booming international package demand

–higher personnel costs from health care plus restoration of salary and benefits cut during the recession

–writeoff of merger costs, estimated at $150-$200 million.

This kind of stuff happens every once in a while.  It seems to be bothering analysts, but I don’t think it’s such a big deal–especially if #1 and #2 end up doing what FDX thinks.

If both #1 and #2 pan out, FDX looks to me like a very cheap stock.

Harley Davidson (HOG) as economic barometer–positive signs

Harley Davidson (HOG) is an iconic American company. Harley Davidson motorcycles have typically been an aspirational purchase for men over 35 (maybe 50+ and having gray hair might be a more accurate characterization). They carry echoes of Easy Rider, The Grateful Dead, and the Sixties Generation, as well as a hint of the power/danger of the biker gangs whose staple ride they are.

HOG is a particularly interesting company operationally, in my opinion. It is trying, with some success, to broaden its image to appeal to younger riders, women and minority group members. The company is also rationalizing its manufacturing operations and gaining better control over the workings of HDFS, its credit arm. All these moving parts present opportunities for a careful researcher to find evidence of potential positive earnings surprise.

And, of course, Warren Buffett, himself an icon, has recently become a significant shareholder.

In this post, however, I’m more interested in HOG as an economic indicator than as a stock to buy. Motorcycles are perhaps the ultimate discretionary (read: frivolous or unnecessary) durable purchase. A Harley may cost $20,000 and, though it may be a joy to ride, it’s not particularly useful. Boats probably top the list for frivolity, but they don’t appeal to as wide a demographic as bikes. (I own a small runabout and a couple of Harley t-shirts, but no bike—so far.)

HOG reported its June quarter results yesterday morning. They contain two positive signs for the US economy.

The first positive is in domestic motorcycle sales. Although they remain at only about 60% of the pre-financial crisis level, they are up slightly year on year.


2008           -13.0%     +7.9%            -2.0%

2009          -25.8%      -3.4%            -12.8%

2010          -15.7%      11.2%            +1.3%

On the one hand, the growth in sales comes from purchases of used motorcycles. But they are sales nonetheless. And they are coming after HOG significantly tightened up the credit-granting standards of its finance subsidiary, HDFS, which makes bike purchase loans to about half of domestic Harley buyers.

Shipments of new bikes from HOG to its dealers are also up slightly in the first half.  Overall dealer inventories are down by over a third vs. this time last year, with only supplies of used bikes higher than normal.

All this is good news for HOG. For the economy, the interesting thing is that men are becoming comfortable enough about their personal financial circumstances to be starting to buy Harleys again (without fearing divorce or severe bodily harm from their wives).

The second piece of good news comes from HDFS. It concerns loss experience and loan delinquencies.

At 4.5% of outstanding loans, those with payments more than 30 days overdue is somewhat higher than Harley’s pre-recession experience (3.6% in 2Q06 and 4.4% in 2Q07), But its not that far above- and it’s lower than at this time last yea ror the year before.

Loss experience is better, as well.  The current annualized rate of 2.04% is better than in either of the past two years.  It’s also within striking distance of the 1.63% posted in the first half of 2007 and the 1.20% of the first six months of 2006.   This good performance is partly because 85% of HDFS’s loans are now prime (5%-10% higher than pre-2009), partly because used bike prices, which plunged during the worst of the financial crisis, have begun to rise again.  But it must also be in part due to the fact that money isn’t so tight as it was during the worst of the recession.

I’m of two minds about the stock.  I don’t regard the Warren Buffett endorsement as a plus.  Mr. Buffett, one of our profession’s true geniuses, saw much earlier than anyone else that brand names and established distribution networks–in other words, intangible assets–had an immense value that was neither listed on the corporate balance sheet nor a factor in the thinking of his contemporaries.  So you could in effect buy them for free.  –and that’s what Mr. Buffett did.

But the insight came almost a half-century ago.  Everybody knows it now, just as well as everyone knows about Benjamin Graham.  So the Buffett touch isn’t enough any more, in my opinion.

In the case of HOG, however, a genuine corporate turnaround appears to be underway.  More in a later post.

add trains (cargo, anyway) to boats and planes: they’re all making good money again

In an earlier post, I pointed out that world trade was beginning to boom again.  Evidence of this was coming from comments from the shipping industry trade association and from FedEx.  Several more bullish pieces of evidence have come in since.


European container shipping giant Maersk announced last week that its container business was doing much better than expected, and that as a result it was raising its full-year earnings guidance from “a modest profit” to a profit of more than $3.5 billion.  Ironically, the restructuring of French container shipper CMA CGM has reportedly been complicated by the fact that the company has recently swung from big losses to substantial profits.  In both cases, the key element in the turnaround is improvement in the Asia-Europe route.

Expeditors International (EXPD) chimed in with similar sentiments two days ago.


The most stunning of the June quarter earnings reports I have seen has been INTC’s.  But the most interesting, to my mind, has been been the one from CSX.  Why?  The railroad is an east-of the -Mississippi shipper of intermediate industrial materials, autos and coal.  Its revenues were up 22% year over year, based on increased volume.  Operating earnings were up by a third, despite flat unit volumes in the agricultural and housing-related (forest products) businesses.  Chemicals, Metals, Phosphates and Autos were the stars.

I have no opinion on CSX as a stock.  And railroads are a mystery to me.  But the good results seem to show that we’re starting to see a pulse again in general industrial activities in the US–not just the areas where the US is a world leader, but also ones that serve the daily needs of the domestic economy.

How does all this square with the just-released June minutes of the Fed’s Open Market Committee, in which it shaved a bit off its economic growth forecast, and slowed the rate at which it thinks unemployment will fall?  That’s tomorrow’s post.