Is the global economy approaching a severe recession? This question was at the center of a discussion among the top economists on Wall Street last weekend following reports published by the shipping giant FedEx (FedEx). The company presented a weak performance and its CEO claimed that the reason for this was a slowdown in the global economy and an impending recession. Other senior analysts analyzed the picture in a slightly different way.
FedEx recorded its sharpest daily decline since 1987, when it plunged 21% last Friday thanks to extremely dismal preliminary results for the first fiscal quarter, and mainly due to the cancellation of forecasts for the entire year. The investors, who regard the transport and logistics companies as a preliminary indicator of what is really happening in the economy, panicked and in one evening deleted 11 billion dollars from its value. At the same time, there are voices in the market who believe that FedEx should mainly blame itself.
CEO Raj Subramaniam, who replaced legendary founder and CEO Fred Smith who recently retired, said in a report on Friday that “global shipping volumes have declined as macroeconomic trends have worsened, both internationally and in the US,” noting rising inflation which harms the purchasing power of consumers, the sharp interest rate increases that are trying to combat this – and at the same time the continuation of corona restrictions in China that harm production and supply chains.
FedEx in particular and delivery companies in general are very sensitive to the monetary conditions in the world, therefore as mentioned the market tends to see their performance as a forecast for the economic activity as a whole. “We are a reflection of everyone else’s business, and especially of the world’s most valuable economy,” CEO Subramaniam said in an interview with CNBC, where he also warned that he expected the economy to be headed for a “global recession.”
The “excuses” are not disconnected from reality
FedEx’s “excuses” are of course not disconnected from reality. According to the dry data, the USA is already in a recession, after recording a contraction in GDP for two consecutive quarters. In addition, inflation is not moderating at the expected rate despite the sharp drop in fuel prices and it stands at 8.3%, at an annual rate, lower than last month, but higher than forecasts More worrying than this was the core inflation (excluding the fluctuating energy and food prices) which rose from 5.9% to 6.3% on an annual basis.
After the release of the data, Wall Street recorded its worst day of the year. The market internalized that the chairman of the Federal Reserve, Jerome Powell, who made it clear that he is determined to fight inflation even at the cost of “a little pain” for the economy, will raise the interest rate sharply this coming Wednesday as well. The market is pricing in an 82% probability of a 0.75% increase.
FedEx published the preliminary results about a week before publishing the full report, and presented a sharp drop in profit alongside missing forecasts in the revenue line as well. The company recorded in the quarter (which ended on August 31) an adjusted profit of $3.44 per share, which is 21% lower compared to last year and does not come close to the analysts’ forecasts of a profit of $5.14 per share. The revenues amounted to 23.2 billion dollars, an increase compared to last year, but in this section too, it missed the market forecasts for revenues of 23.6 billion dollars.
For the second quarter, the company expects an adjusted profit per share of $2.75 on revenues of approximately $24 billion. The company canceled the annual forecast, which was set only in June, due to a “volatile environment that prevents prediction”. Wall Street estimates for the second quarter were $5.48 per share, so it’s clear why the profit warning sent the stock down.
In order to cut its costs, FedEx announced that it would close nearly 100 offices, postpone the recruitment of personnel, reduce flights and cancel projects.
Do the economists buy FedEx’s explanations?
Not everyone believes that the source of the bad report is the economic slowdown in the US or the looming global recession. At Morgan Stanley, they estimate that this is simply a return to normal with a natural decline in demand after the peaks recorded during the Corona period, and analyst Ravi Shankar even warns that the problem will likely not be fleeting, and that this is just the beginning of the “disengagement after the pandemic”.
The investment bank Stifel also believes that “this is not the full picture”, according to analyst Bruce Chan, who pointed out that “missing the forecasts was significantly worse, even considering the background data”. Chan cut the target price per share by almost $100, saying: “There are some concerns about the macro issues and the volume of shipments, and UPS and DHL and other companies are also feeling some pressure. But when you look at the almost 40% miss in earnings, I think the majority is attributable to the company. I I don’t expect to see in any other company a decrease in revenues and profits in the volumes registered by FedEx,” he said in an interview with “Yahoo Finance”. “There are real reasons for concern about the macro picture and inflationary pressures, and certainly about what is happening in China. The markets have a tendency to want to add to the whole what happened with FedEx and see its situation as a harbinger of doom, but I think these are separate events,” Chan estimates.
FedEx’s report states that “the results were particularly affected by macroeconomic weakness in Asia and challenges in the delivery of the service in Europe, which reduced approximately $500 million in revenues in this sector relative to the company’s forecasts.” However, the war between Russia and Ukraine started already in February (when the reporting period is June-August) and the Fed’s interest rate hikes also started before the reporting period. The weakness in Asia is also puzzling, since China’s “zero corona” policy began disrupting supply and production in the country back in March, and since then the situation has improved in most provinces. Also, the still high shipping prices should have helped FedEx maintain a higher level of profitability, even if shipping volumes decreased.
Chen Herzog, Chief Economist at BDO estimates that “the global air freight market is facing a slowdown in the rate of growth in demand as a result of the slowdown in the global economy. The slowdown in the industry reflects a temporary excess of production capacity, and over time a continued increase in demand is expected.”
That said, FedEx seems to have a history of setting overly ambitious goals and then painfully coming back down to earth. Thomas Black points out in a column in “Bloomberg” that in 9 of the 10 years that FedEx published an annual profit target – it reduced it at least once. In 2019, even before the outbreak of the corona epidemic, the company published a forecast, raised it and then cut it twice.
For the competitors, the situation is less bleak
Compared to FedEx, competitor UPS confirmed its annual forecasts at the beginning of the month and CEO Carol Touma expressed optimism: “We have confidence in our ability to achieve our forecast for the entire year, despite the dynamic macro environment,” she said in a conversation with analysts about two weeks ago.
UPS released its second quarter reports at the end of July and beat the revenue and profit forecast. The reports show that its shipment volumes also decreased beyond expectations, but it attributed the decrease mainly to the reduction of contracts with Amazon and the strong dollar. Inflation in the US peaked in July, but the delivery company still estimated that there would be an improvement in delivery volumes despite the expected slowdown in the US economy due to the tightening of monetary conditions. with a high yield,” explained analyst Bruce Chan from Stifel Investment Bank.
Even the German postal company DHL, which has extensive international operations, estimates continued growth in trade despite the winds of the approaching global recession, the war in Ukraine and supply disruptions in China. In addition, the company managed to increase its sales and profits in the second quarter and beat analysts’ forecasts. “Despite the somewhat cloudy outlook, the trade industry continues to be very resilient,” said the CEO of DHL Express in an interview with Squawk Box Europe last week.
Besides Chan, many investment houses lowered their target prices on FedEx stock and some also lowered its rating from buy to hold. According to the website MarketBeat, the average target price of the stock is $245, while about a month ago it was close to $300. Today the company’s stock is at a low of more than two years and the price is 161 dollars, after falling by about 38% since the beginning of the year. UPS shows excess performance in this segment as well, and although it lost 4.7% in response to FedEx’s report on Friday, its decline from January is lower and amounts to 17%.@