FedEx Lowers Outlook on Economic Conditions

The earnings report from FedEx (FDX) this morning puts the spotlight back on the global growth worries that were drowned out by the hoopla surrounding the Fed's QE3 announcement. Investors seem to think of QE3 as the panacea that Bernanke was at pains to point out it was not. The Fed’s new program hasn’t had much chance to do its magic on the economy yet, but one can reasonably assume that it is largely irrelevant to the type of issues facing global bellwether operators like FedEx.

FedEx came ahead of the lowered guidance it provided two weeks back. But whatever that positive surprise is worth, it is more than offset by lowered guidance for the current quarter and full fiscal year. The company’s ecommerce centric package delivery business seems to be doing fine and would likely get a further lift in the current period from strong demand for Apple’s (AAPL) iPhone 5. But it is the international air freight business that accounts for more than 60% of the firm’s revenue which is facing weakening demand as a result of the worldwide economic slowdown.

We will likely hear more about this theme of weak economic backdrop weighing on corporate profitability as the third quarter earnings season gets underway. Estimates are for total earnings to drop 3.9% in the third quarter from the same period last year, which reflects a roughly equivalent drop in revenues and flat margins. This is the weakest earnings growth outlook at the start of a reporting season that we have seen since late 2009. Expectations are for a turnaround in the fourth quarter, with earnings expected to increase a solid 7.9%. For next year, the consensus expectation is for growth of about 10%, on top of the high single digits growth this year. Count me as skeptical of these forecasts. With growth a problem all over the world, these growth expectations may not be much different than just ‘hoping for the best’.

Technically speaking, the third quarter reporting season started today with the FedEx report today, though the market starts paying attention only after Alcoa’s (AA) results next month. We still have some time to go before then. But I would be surprised if the market can build on its recent gains in this time period. And hardly anyone would find the key take-away from the actual reporting season to be reassuring enough to sustain the gains made in recent days. Bottom line, this fall may not be that kind to the stock market.

Source: Zack's Investment Research