Tuesday, September 22, 2009

So, What’d They Say?


So what, exactly, did FedEx say on the conference call last week?

Well, Fred Smith, the genius who started the whole thing, began the call with his standard overview of what’s happening and what he sees ahead.

In the previous quarter—ended in March—the best Smith could say was this (courtesy of the indispensible StreetEvents):

While the severe global recession continues to throttle somewhat FedEx's growth, we do see signs of stability as the rate of decline appears to have leveled off. In this regard, declines in FedEx Express International shipments appear to have bottomed and are at levels similar to last quarter. How long this bottoming out process will take and how strong the recovery will be remains of course uncertain. We believe however, the worst of the recession is likely behind us.

We remain optimistic about a turnaround beginning later in calendar 2009.

Three months later, the “bottoming out” and “rate of decline” has turned into something more positive:


Our financial performance was stronger than what we expected in June, thanks to a modestly improving global economy, strict cost management, and solid execution of our strategy. During the first quarter of FY '010, FedEx Ground and FedEx Freight noted positive month-over-month volume trends. Compared to the fourth quarter of fiscal year 2009, our International Priority volume at FedEx Express showed positive sequential trends.

These are encouraging signs of a more stable economy.

Still as many readers—particularly those who appear sat out the head-snapping stock market rally off the March lows—have pointed out in these virtual pages, champagne corks are not exactly blowing the lights out in Memphis.

Compared to last year, the numbers are still down—down $2 billion in revenue last quarter alone, thanks to the fact that volumes, while currently rising from the basement, have still not reached the ground floor yet, let alone the first or second floors.

And the business is still suffering from price declines “in a very competitive pricing environment.”

But FedEx was more willing this quarter than last to offer a view of the U.S., and it is one of recovery:

We are hopeful and confident as we move ahead. Forward-looking indicators such as new manufacturing orders, and the Conference Board's US leading economic index increased four consecutive months through July. In August, US factories saw their output rise for the first time since January 2008. At FedEx, we expect calendar third quarter GDP to grow about 3%, followed by roughly 4.9% growth in quarter four of calendar 2009. For calendar 2010, we believe US GDP will grow 2.9%.

More importantly, industrial production, a significant driver of FedEx's business, should improve more than 4% in 2010, a strong contrast to its 10% decline in 2009.


Here's hoping they're right.

And next up at NotMakingThisUp: The Best Contrary Indicator We’ve Ever Seen.



Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.



6 comments:

But What do I Know? said...

Thanka for following up on this. At the risk of appearing too negative, that last bit about the projected GDP and leading indicators seemed unsatisfying, almost as if he didn't have anything specific to say about FedEx itself, so he fell back on some generic statistics. (Obviously I didn't listen to the call, so if he did have some company-specific forward-looking comments, I apologize.)

If I can do a rough translation of the comments--"Things aren't getting any worse right now. We're not where we were eighteen months ago, but sales were a little better last quarter. Everyone says they're going to continue in that direction, and we hope they do, but we're not planning on hiring/expanding until we see some evidence of that in our own revenues. As long as we keep our own costs down we'll be alright."

I think you're going to see a version of that statement from many companies this quarter. That's all fine and dandy for FedEx and the like, but how does it lower unemployment? (Not that this should be FedEx's concern.) It almost seems to me that the paradox of thrift is a phenomenon of businesses and not of consumers.

Anonymous said...

Jeff:
A good follow-up article. But I look forward to the comments; I always find the amount of confirmation and assimiliation bias exhibited to be just as interesting.
American Bandersnatch

John said...

Is this " And next up at NotMakingThisUP: The Best Contrary Indicator We've Ever Seen . " a new feature ? ...I was just thinking contrary indicators . Like SEC subpeanas or investigations

Andrew said...

Ken Lewis' 9/15 proclamation that his "optimistic side is coming back" must surely be the best contrary indicator I have seen. Watch out below......

Aaron said...

Jeff:

Well, I listened to the Fed Ex conference call from last week, and here are the key numbers I took away from listening to a confident Fred Smith and his very knowledgeable executive team:

A) $2.6 billion – this is the amount that FedEx is planning to spend in Cap Ex from cash flow, of which 46% will go toward aircraft purchases. I noticed that a lot of their future cap ex spending will be on fuel efficient airplanes like the Boeing 777’s and the MD 10’s, to replace their existing fleet. This is a smart move by Fed Ex as they attempt to get in front of fuel price instability over the coming quarters. I also thought their introduction of electric vehicles to their fleet in England is just one more way that Fed Ex is really trying hard to get a grip on their fuel costs, which is V x 2 – variable and volatile!

B) 5.9% - This is the rate increase at Fed Ex Express which goes into effect in 2010. What’s interesting about this number is how the rate increase is lower than what they’ve charged back in 2008 and 2009 (6.9% - hat tip, Ken Hoextner, equity analyst @ Merrill Lynch/BofA). The question going forward is how sticky is this rate increase given declining volumes shipped domestically? You know as I do that, for all intents and purposes, Fed Ex, along with UPS, is now a domestic duopoly in the shipping/freight business with the demise of DHL. Fed Ex’s shipping rates, going forward, should stabilize their domestic revenues even with lower volume/lighter weight packages.

The other key takeaway for me is how they see both Asia Pacific and Latin America as their key growth drivers in International Priority (IP) in the coming quarters. What struck me about this was how, in their estimation, every international region improved in the last quarter. I thought about this when they also mentioned “increasing capacity only when traffic justifies it.” If economic activity improves globally, so will their package volume with IP, and thus, their revenue base. A weak dollar wouldn’t hurt their earnings either, if other currencies like the yen and the real rise vs. the USD and bolster their earnings in the coming quarters.

Bottom line: If Fed Ex continues to strategically cut costs going into 2010 and their revenue stabilizes with their rate increases, there are going to be a lot of happy investors in Fed Ex! My opinion could be wrong, though…

FWIW – Best question asked was, in my opinion, by Donald Broughton of Avondale Partners on the change to the Fed Ex air fleet for possible fuel savings. I would be interested in your opinion, if you could share, who in your estimation asked the best question on the call?

Jeff Matthews said...

Aaron: You should be a sell-side analyst. Well said.

I agree that Broughton's first question was likely the best (so did the FedEx guys).

But I also thought the answer to the RBC question on adding the Asian flight was quite interesting.

JM