FedEx Earnings Highlight Bumpy Economic Recovery

FedEx Earnings Highlight Bumpy Economic Recovery

In a shocking move, the Fed decided to postpone tapering, sending stocks, bonds and commodities soaring. Yet the underlying message about the state of the global economy is none too encouraging, as it implies that the US economy may not yet be ready to stand on its own feet. FedEx's most recent earnings paint a similar picture. The company is generally considered a market bellwether, in part due to the scale of its operations. While it was a fairly upbeat report, the shift toward the company's cheaper transport options are not necessarily a good thing.

Ground growing, express slowing
Investors cheered FedEx's latest quarterly report, with earnings per share of $1.53 topping the $1.50 consensus and up 7% year-over-year. Revenue for the period came in at $11 billion for a 2% increase over last year's quarter, slightly beating the consensus. However, the company didn't follow this up with a raised outlook, as it still expects full-year EPS growth of 7%-13 %.

These numbers look pretty good. However, it's not FedEx's core express business that accounted for the growth. In fact, the segment's revenue growth was more or less flat for the period, but it managed a 14% increase in profit due to higher margins. It is now the ground segment that is driving growth.

Apparently, consumers are increasingly opting for the slower, cheaper ground transportation services. Overall segment revenue increased by 11%, with operating profit of $468 million around double that of the express division. The company now views this cheaper alternative as a prime avenue for growth, and has gotten to work on slashing air cargo capacity and trimming costs .

While this isn't necessarily bad news for FedEx, it doesn't bode particularly well for the world economy. If people opt for cheaper ways to send things, it means that they are less willing to spend money on transportation. As such, this reflects tightened consumer spending. Nevertheless, the company is fairly optimistic going forward, citing improving conditions in China and Europe .

Industry trends
, FedEx's main competitor, also reported a slowdown in express shipping as consumers traded down for cheaper alternatives. Next Day Air declined by 1.5%, as export revenue per piece was down 3.4%. Like FedEx, UPS has now been forced to adapt to changing industry conditions, as forecasts for global economic growth have been lowered for the rest of the year. Going into the back half of the year, UPS expects EPS growth of 4%-13 %.

Deutsche Post DHL's express segment seems to be faring a little better. The company reported rising volumes in this division, with a 4% organic increase in revenue. Citing the same tough market conditions as its American counterparts, DHL witnessed a decline in ocean freight shipping on east to west lines, with the international forwarding and freight division as a whole reporting a 6.3% dip in revenue. Nevertheless, the company upped its full-year EBIT outlook to between EUR 2.75 billion and EUR 3 billion .

Valuations and metrics
A bit pricey, FedEx currently trades at 23.68 times trailing earnings, versus Deutsche Post's 16.23 and UPS' rather bloated 105.66. However, FedEx's forward P/E is very low at 13.39. FedEx's margins are considerably higher than those of the competition, and it also has a low 0.83 price to sales ratio. The company seems to have its balance sheet in order with $4.92 billion in cash and $2.99 billion in total debt. These are some fairly encouraging metrics.

The bottom line
While the thesis of global economic recovery is still largely intact, things do seem to be slowing down a little. The Fed has decided to continue with its stimulus program for now, which despite sending shares higher is not fundamentally good news. At the same time, shippers are reporting a shift toward cheaper transportation alternatives, which also indicates a slowdown in consumer spending. That said, FedEx seems to be adapting fairly easily to shifting industry conditions.

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Daniel James has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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