the Fedex 4Q11 earnings report: blue skies ahead

the results

FDX reported quarterly results for its 4Q11 (the FDX fiscal year ends in May) before the start of trading in New York yesterday.  The company posted earnings per share of $1.75, up 31.5% year on year, on revenues of $10.6 billion, a 12% gain vs. sales in the fourth quarter a year ago.  The numbers, which Wall Street typically forecasts with a very high degree of accuracy, exceeded analysts’ eps estimates by $.04.

eye-popping earnings guidance for fiscal 2012

In the same earnings release, FDX gave its initial earnings guidance for 1Q12, as well as for fiscal 2012 as a whole.  For the full fiscal year, the company expects to earn $6.35-$6.85 per share;  for 1Q12 it thinks it will have income of $1.40-$1.60. Taking the midpoint of both ranges, that would imply profit growth for the full year of about 35%, and for the first quarter of about 25%.

These are eye-popping numbers.  They reflect:

–the strength of FDX management,

–the company’s high gearing to world trade, which responds in a high-beta way to world economic growth, and

–FDX’s significant exposure to international markets, which the company thinks will approach half of total revenue, and represent the majority of the firm’s profits, this year, for the first time in its history.

the stock

Let’s say the earnings guidance signals that FDX really thinks $7 a share is within reach for the fiscal 2012.  That would imply that the stock is now trading at around 13x forward earnings, or a slight premium to the market.

I’ve owned FDX on occasion over the years.  My overall take is that the management is excellent, but that the stock is so widely followed and respected that it seldom trades at a bargain price.  My first instinct is that the shares do look cheap today.  But glancing at the issue’s multiple relative to the market during the past decade, this is about where FDX normally trades.  So I’m sitting on my hands for the moment.

the FDX economic outlook

Transport and logistics companies are interesting in themselves.  But there’s also a second reason they’re so widely watched.  Because they have such intimate knowledge of the production plans of their customers, they have an unusually good understanding about how the economy is faring in the areas where they operate.  With its long experience, and its position as the premier global air transport firm, FDX has a particularly advantaged view.

Here’s what it’s expecting over the coming twelve months:

–“moderate” economic growth, with the rest of the world doing better than the US,

–acceleration of growth as the year progresses.  Why?

ο  FDX thinks that 40% of the current “soft patch” is due to the the negative effects of the earthquake/tsunamis in Fukushima during March.  The company can already see activity picking up, however.

ο  Higher oil prices caused another 40% of the slowdown, in FDX’s view.  The oil price has been falling for two months, however, in large part because consumers have reacted by using less.  FDX expects oil to stay at today’s level or lower–exhibiting the same behavior it has in similar circumstances in the past.

ο  The remaining 20% is negative sentiment, based on the previous two factors.  FDX expects sentiment will gradually recover as consumers see supply-chain recovery in Japan and lower petroleum prices.

my comments

Two things strike me about the FDX report.  First, the company’s economic forecast sounds very much like the one Fed Chairman Bernanke outlined yesterday.  Second, even a so-so economic environment is enough to allow well-managed companies to make very large profit gains–implying good stockpicking will be well-rewarded in the current environment.




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.

the stock market and the unemployment rate

Can the US have a robust economic recovery without a fall in the unemployment rate?  Probably not.   GDP growth can be seen as the product of changes in two factors:  the number of workers and productivity.  Without an increase in the workforce, the country’s economic engine is operating on only half its cylinders.

Can the US stock market maintain a substantial advance without a decline in the unemployment rate?  Certainly, it would be easier for US stocks to go up if the domestic economy is booming.  But that may not be entirely necessary.  Several reasons:

1.  Only about half of the profits generated by publicly trade firms come from the domestic economy.  The health of Europe (currently being invigorated by the collapse of the euro) and of emerging markets are also important.

2.  Even the domestic portion of S&P profits doesn’t mirror the structure of the US economy closely.  Some of the weakest economic sectors, like housing, commercial real estate or autos, have virtually no representation in the market.  In addition, only the strongest firms are able to qualify for listing.  So normally the performance of the domestic arms of publicly traded companies is far ahead of that of the overall economy.

3.  (the real reason for this post)  I think it may be important to distinguish between businesses that produce necessities and those that benefit from discretionary spending.  Yes, this is a fuzzy distinction.  Producers of pure commodities like energy may be one thing.  But even staples producers have both value and premium brands, that consumers trade up and down between as economic circumstances dictate. 

Still, there may be an important difference between the profit potential of companies that depend on having more people having jobs and those that benefit from already-employed people having more money to spend.  I think the second group has much greater potential than the first.  How so?

As their operating performance is improving, I’ve been noticing more and more companies who had reduced working hours, or wages/bonuses, or benefits like a 401k match, restoring them.  The latest two examples have come this week:

a.  Fedex, which also remarked in its May quarter earnings conference call on the “undue pessimism” of investors that’s not supported by the strengthening world economy, stated that it is reinstituting pay raises and is restoring half of its suspended 401k match.  Personnel expense for this global company in the fiscal year just ended was something over $14 billion.  My (admittedly rough) guess is that raises and 401k together will amount to an extra $100 million paid to US employees in the coming 12 months.

b.  Wynn Resorts is restoring wages and working hours for most of its employees in Las Vegas to pre-recession levels, at a cost of about $7.7 million yearly.  At the same time, in order to be able to do this (WYNN is cash flow positive but still unprofitable in Las Vegas) the company is laying off 261 workers. 

This may represent the 2010 economic recovery dynamic in a nutshell:  businesses not hiring anyone new, and maybe even laying some people off, but paying existing workers signficantly more than they are earning now. 

The relevant investment question is what these better off workers will spend this extra money on.  Of course, they’ll probably save a larger portion than they would have before the recession.  But they’re certainly not going to spend it all on basics.  There’s already evidence that some WalMart customers are trading up to Kohls, Target or Macy’s (although others are apparently trading down to the dollar stores).  Maybe they’ll take a step further and trade up to mall stores.  My guess is that people will splurge on smartphones, TVs and vacations. 

In any event, however, the 90%+ of Americans who are working will likely be spending signficantly more in the year ahead than Wall Street now expects.  So the portion of the S&P that depends on strong domestic consumer demand will probably do well. 

If we add all this up, the 50% of the market that’s non-US has good prospects.  Let’s say half of the remainder (probably too low) stands to benefit from spending by those now emplopyed.  That would imply that at most a quarter of the market’s capitalization is going to exhibit earnings weakness.  In my experience, the “good” proportion is high enough to be able to drag the “bad” part of the market along with it on an upward journey.  Were the proportions reversed, the “good” stocks would be relative performers, but would likely be mired in a Japan-like swamp.

one caveat

This story will take some time to play out.  It may be another year, or longer, before consumer demand gains enough momentum for companies to begin to look toward the long-term unemployed as a source of workers.  Chronic unemployment at a high level may not be politically acceptable (arguably it should not be acceptable).  I have no idea when or how efforts might be made to redistribute economic energy from the 90% to the 10%–or what effects any attempts to do so might have on stocks.  Something to be on the alert for, though.