FedEx Tapes The Bottom

By Eric Fox | March 24, 2009 AAA

Although FedEx (NYSE:FDX) reported a decline in fiscal Q3 earnings year-over-year, the delivery giant used the opportunity to call a bottom in the economy. Furthermore, it went on to predict slow growth for the balance of 2009 and into 2010. Many investors consider package delivery companies to have more insight into the direction of the economy than the relatively stale government reports. Therefore, it would be wise to pick through management comments for clues.

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FedEx Fails To Deliver Earnings

FedEx reported earnings per share (EPS) of 31 cents per share on sales of $8.14 billion. A significant drop, the company's EPS for the same period last year totaled $1.26 per share on sales of $9.437 billion.

Packing Peanuts
FedEx's U.S. domestic package volume declined 3%. Given the contracting U.S. economy, a larger drop was expected. Perhaps the blow was softened somewhat by DHL's withdrawal from the market?

Revenues in many of the carrier's segments suffered much greater percentage drops than the domestic volume, as the company reversed fuel surcharges that had been imposed when gasoline prices were much higher. However, FedEx is putting into place $1 billion in expense reductions by fiscal 2010. The carrier's expense base totaled $35.878 billion in its last full fiscal year. (Before investing, read Financial Statement Analysis to learn what it means to do your homework on a company's performance and reporting practices .)

A Box With A Bottom?
The most surprising information to come out of the earnings release and conference call was an apparent call by the company's management of a bottom, or trough in the economy. "As we all know, the global economy has been very weak during this period of time," said FedEx CEO Fred Smith. "There are, however, positive signs supporting eventual improvement in the economy. We do not anticipate that there will be a significant further decline in GDP for calendar 2009. It will definitely be weak probably for the year [and it will] be a down year in terms of GDP coming into 2010, perhaps with lower growth."

Smith cited the inventory-to-sales ratio, which spiked higher as consumers and businesses cut back on purchases. He believes that the reorder or replenishment cycle will begin by necessity, as these inventories are being "bled off". (For an introduction to profitability indicator ratios, check out Profitability Indicator Ratios.)

United Parcel Service (NYSE:UPS) did not make similar comments when it released quarterly results on February 3. The company reported diluted earnings per share of 25 cents. CFO Kurt Kuehn stated that 2009 would be "one of the most difficult in UPS's history."

Containerboard
Investors also look at trends in demand for containerboard for information on economic growth. During its most recent conference call at the end of January 2009, International Paper (NYSE:IP), one the largest manufacturers of containerboard, stated: "December may have been close to a bottoming out period for us and it's slightly stronger going into January and February." Temple-Inland (NYSE:TIN), a smaller competitor of International Paper, made similar confirming comments on its most recent call. "Our December shipments were better than November shipments and January shipments to-date are better than December levels," said Doyle Simons, Chairman and CEO of Temple-Inland.

Bottom Line
FedEx appeared to call a bottom in the economy, a significant event, given the company's placement in the supply chain and its associated inside look at growth trends in deliveries. Investors might want to use this information in stock selection processes before the recovery becomes consensus.

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