Mark Newman wrote an article in the WSJ this past Thursday implying that the bottom of the market might be in because FedEx said the economy wasn’t expected to get much worse and the stock traded up. Investors were infatuated with the comment that inventories might have bottomed last quarter (not surprising considering things couldn’t get much worse). As an economic bellwether FedEx is an important company to keep your eye on. But there is more to the story than that.
Unfortunately for Mark the stock gave up all of Thursday’s gains and much more on Friday. I was on the call Thursday AM and watching the stock trade trade pre-market. It was classic short covering and nothing more. After a quick trade down, the selling lapsed and the short covering immediately began. After all, the market was ramping Thursday morning in a very confused post-Fed decision hangover. That rally in the overall market did not last long, but FedEx remained bouyant in a weak market mostly because there were no new short-sellers to push the stock lower. Nonetheless, the stock tanked on Friday after analysts had 24 hours to scour the income statement. It was nothing short of disastrous:
FedEx posted a 72% decline in operating income. Revenues were down 18% year over year. They missed estimates by 15 cents, revenues missed handily and reduced their guidance 50% lower than estimates. There was no good news in the report. In worse news, FedEx did not actually say that they thought the economy had bottomed or that they saw a rebound in the offing. Here is the actual commentary on the call:
What we’ve seen in fiscal year ’09 are quarter sequential declines in International Priority where we were about flat in the first quarter, we were down 6% or 7% in the second, we’re down almost 14% in the third. We think that’s about to bottom. As our fourth quarter we don’t think we’re going to see continued quarterly sequential declines.
Justin Yagerman – Wachovia Capital Markets
When you’re talking about volumes bottoming both on International which got worse this quarter sequentially and Domestic which let up a little bit, what gets you confidence that we’re seeing that bottom? Are you getting a better result in March as we moved into the fourth quarter for you guys? Is there something out there in terms of business trends from customers activity that they’re talking about that gets you that level of confidence? It feels like every time we’ve tried to call a bottom in this economy that bottom tends to fall out a bit.
When I was referring to the bottom before I was talking about our International Priority. We do believe that quarter to quarter sequentially we’re going to see improvement in the second calendar quarter here in 2009 from what we’ve been seeing in terms of the big deep red numbers. Whether it’ll be actually positive or not in the second quarter remains to be seen but by the end of this calendar year sequentially, not year over year, but sequentially we believe it will be improving.
During the fourth calendar quarter what happened was basically a hard down by a lot of people in terms of their purchases. You had a huge spike in inventory and the inventory to sales ratio went up to levels that hadn’t been seen in years. The low replenishment levels that have been going on are not sustainable if you assume that the economy is not going to continue to contract. At some point you have to begin the reorder cycle. We track this very carefully; we have a great economist Gene Huang who’s sitting in the room here with me to pull my ear if I say anything wrong.
When you get towards the later part of this year you will have to have some increase in the order cycle if you don’t have a decline in the GDP. 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 be a down year in terms of GDP coming into 2010 perhaps with lower growth. That’s the basis on which we make the comments because the inventory to sales ratio, the inventories are now being bled off and they’ll have to be restocked beginning later in the year if the economy stays even at these levels.
So, in essence, they say the economy is still incredibly weak, will remain weak, but that sequential growth will be better because the 3rd quarter was so incredibly bad that things sequentially can’t get much worse. Does that mean the stock is a buy or that the economy has bottomed? Most certainly not. Don’t forget, the economy ground to a complete halt in October and November. That doesn’t mean the economy is rebounding. It just means it’s impossible for the economy to remain at those kinds of levels forever.