There were many interesting takeaways from FedEx’s Q2 conference call this morning. FedEx is an important barometer of global economic health as they serve as one of the few transports that truly reaches all segments of the global economy. Their outlook for the economy can really be summed up by two different comments made on the call. CEO Fred Smith told analysts:
“We expect a phase of somewhat slower economic growth going forward. Slower growth is consistent with historic business cycles.”
FedEx CFO Alan Graf told analysts:
“We have been debating that ourselves. But actually it’s a pretty simple answer. The first quarter sequentially had a very big benefit from fuel and the second quarter will not. That is one of the major drivers. Then there are some additional cost adjustments and things, a number of them. Maintenance and repairs, for example, will be higher in the second quarter than the first-quarter at Express again, as we try to work down this huge backlog of traffic we have all around the world and we continue to add planes.We also have a few other expense categories that we are going to invest in and … I will be willing to talk about those after we do it. But having said that, I would not focus on the second quarter. I would focus on the range for the year and the momentum we will have going into fiscal 2012.”
Cutting to the chase – FedEx issued weaker than expected guidance. They’re clearly seeing strong demand in the international market, but the “recovery” is very uneven. The inventory restocking phase and the end of government stimulus in the USA appears to be revealing some signs of underlying demand weakness. This is forcing them to be proactive. Their margin woes as expressed by their CFO are significant. They are realizing that Wall Street’s estimates are ahead of the game. Their response? Cost cuts. They’re firing an additional 5% of their workforce in an effort to generate $150MM-$200MM in savings. They might not be expecting a double dip, but they’ll be prepared for one….
In sum, the global economy isn’t collapsing, but companies are beginning to tighten their balance sheets up again as some risks appear on the horizon.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.