Friday, March 19, 2010

What Hamlet Could Have Taught Day-Traders About FedEx

“There is nothing either good or bad, but thinking makes it so.”
—Hamlet, by William Shakespeare

Breathless headlines hit the tape yesterday morning before the market open: FedEx was reporting a better-than-expected quarter, but what looked like disappointing guidance.

According to our, in fact, FedEx shares were “gapping down” more than $3 a share in pre-market trading on the news.

Now, if you’re thinking the reason for the so-called “disappointing” guidance from that Memphis-based economic bellwether was something like a sudden collapse in demand for FedEx’s bread-and-butter package delivery, you would be wrong.

In fact, if you’re thinking the reason was in any way a bad reason, you’d be wrong. The reason was actually quite good.

The reason was higher bonus accruals.

That’s right. FedEx is starting to share the wealth with its employees. Here’s how the CFO put it on yesterday’s conference call with Wall Street’s Finest after the press release came out:

Our results also include the impact for accruals for our variable incentive compensation programs…which we did not have in the prior year. The impact of restarting these programs will dampen our earnings growth both in the fourth quarter and into fiscal 2011, although we do expect our earnings growth to be substantial.

And for that, the stock was down $3 before the market even opened.

Eventually, cooler heads prevailed. Rational shareholders who took Hamlet’s advice and actually thought about it came to realize what FedEx said was good news, not bad.

FedEx shares actually closed the day up nearly $3.

Now, to be clear, we offer no opinion on FedEx as a stock. We could not care less whether it goes up, down or sideways.

What we do care about is what FedEx says about the state of its business.

Indeed, long-term readers know that we here at NotMakingThisUp view FedEx and its near-twin UPS as the two most important canaries in the economic coal mine.

And by all measures, the air is clear.

If not, FedEx would certainly not be reinstating merit salary increases, incentive bonuses, and half the 401-K match, all of which went away during the crisis.

Better still, FedEx isn’t the only company that has been loosening up on the purse strings and sharing the wealth with somebody else besides the shareholders who have benefited massively from the unprecedented cost-cutting of the last two years.

Recent earnings calls with companies as diverse as Hibbett Sports (“a big bump in the bonus accrual”), Cheesecake Factory (“higher performance bonus accruals”), and Nordstrom Inc. (“higher performance-related expenses”) have all carried the exact same message as FedEx.

And that is why the news from FedEx, as anyone who studied their Shakespeare would know, was actually quite good if you thought about it longer than the one or two seconds it took to see the headline about “disappointing guidance” cross the tape.

So, to the tape-reading day-trader who blew out of his or her FedEx position early yesterday morning after seeing “the print” cross the tape…keep in mind that what is going on here is much larger than the penny or two distortion those higher employee compensation expenses are causing in quarterly earnings reports from public companies across America.

What’s going on is this: companies are starting to share the wealth, and that is good, not bad.

Read your Shakespeare.

Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


Anonymous said...

You can add Staples (SPLS) to your list of companies announcing disappointing guidance due to paying bonuses in 2010 and none in 2009.

Anonymous said...

I thought companies with large cash hoards were going to be hiring aggressively and spending large quantities of money on CapEx to position themselves for the dramatic growth that we're experiencing now that the Great Recession is over. Is the payment of bonuses and stock repurchases a sign that companies aren't going to hire and expand? Why not? Because they don't feel it would improve future profits? (This is a global question. Not just specific to FedEx.)

Anonymous said...

I would think that merit salary increases, incentive bonuses, and the like are coincident indicators, telling us about the recent quarter. I have not seen CEOs cutting those rewards a quarter or two before downturns in their business. Certainly no reduction in rewards were noticed for employees involved in the internet industry or, more recently, in the financial industry, before their results tanked. They have no more crystal ball than the rest of us.

Andrew said...

How about, what Hamlet could teach the Federal Reserve? That would be quite interesting.

Actually, what Voltaire could teach the Federal Reserve: Paper money always goes back to its intrinsic value, 0!

But What do I Know? said...

I thought the Fed Ex report provided an interesting little Rorschach test, so I took the trouble to put together a little free cash flow worksheet using their annual reports going back to 2001. Two things I found interesting: 1) Fed Ex's revenues seem to track the price of oil more than anything else (I guess this is due to their fuel surcharge) and 2)they have traded fairly consistently at 15X adjusted free cash flow (my estimate--not official) over the last eight years (based on the stock price at the end of their business year) except for now, where they seem to be trading about 30% higher than that.

I quickly ran the same numbers on UPS and they didn't seem to show the same skew. Interesting, that's all.