There must be money in gloom and doom. That is the best explanation I can come up with for why there is not more optimism and satisfaction with the global recovery. Despite numerous positive signals on economic growth in the U.S., Latin America and Asia, investors remain fixated on what could happen in Europe and the S&P 500 is basically flat for the year.
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The fiscal fourth-quarter earnings reported by FedEx (NYSE:FDX) on Wednesday reflect a lot of the reasons that I am optimistic about global growth. Volumes were strong and the company is ramping up more assets to deal with even more anticipated growth. That is basically what any investor should want to hear - if companies in the transportation sector are seeing business improve, that should presage better growth.
The Quarter That Was
All in all, FedEx had a solid fiscal fourth quarter. Revenue was up an impressive 20% (to over $9.4 billion) and surpassed the average guess of analysts by about 5%. Within these numbers, the company saw international priority volume grow 23%, ground volume up 7%, and less-than-truckload freight volume up 34%. Looking at the international side, management specifically highlighted strong activity in India, China and Brazil, and shipments of Apple's new iPhone 4 certainly will not be hurting volumes.
It was not all sunshine for the stock, though, and here is where the gloom-and-doom problem emerges. Coming out of the quarter, it seems like people were more interested in worrying about the company's slightly lower guidance for 2011. Higher costs are not a good thing, and FedEx's guidance was softer due to pension and healthcare costs, but the scale of the shortfall was not that large. (For related reading, see Can Earnings Guidance Accurately Predict The Future?)
Already Too Far Down The Road?
One concern is whether the shipping sector has already had its run. The iShares Transportation Average (NYSE:IYT) ETF has doubled off its early 2009 lows and is less than 10% off its highs. Likewise, a host of transportation stocks like Old Dominion (Nasdaq:ODFL), Genesee & Wyoming (NYSE:GWR), Canadian National Railway and FedEx's major rival UPS (NYSE:UPS) are all very near their 52-week highs. In other words, the rebound in economic conditions is hardly new news in this sector.
In an odd way, though, this makes FedEx more interesting, as this stock has not performed as well. FedEx is not necessarily the top operator in the sector (at least in comparison to UPS), but I believe there is plenty of international growth available in the coming years to paper over some of these inefficiencies. (For related reading, check out Top-Down Analysis: Finding The Right Stocks And Sectors.)
Go With The Boats, Or Go With The Rails?
If you dig deeper into shipping, you start seeing some interesting discrepancies. Namely, the ocean-going shipping companies like Genco and DryShips (Nasdaq:DRYS) are weak, but Frontline (NYSE:FRO) and Teekay are strong. Similarly, Old Dominion's stock is quite strong, but rival trucker Arkansas Best is weak.
What that tells me is that investors are not so enraptured with the certainty of global recovery that they are willing to bid up anything with a cargo hold. With that in mind, be cautious about buying stocks that have had big runs and carry higher relative valuations. With a stock like FedEx, though, there is already a discount baked into the price and that could offer a little downside protection if there is a hiccup in the recovery. (For more, see Turnaround Stocks: U-Turn To High Returns.)
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