A line has been drawn, and I believe it's the right move. But at what cost?
On Wednesday, the Federal Open Market Committee, led by Federal Reserve Chairman Ben Bernanke, hinted at a change in policy to spur the economic recovery, saying that "downside risks to the economic outlook for the economy and the labor market as having diminished since the fall."
While that's great news for the economy, it's not necessarily tremendous news for stocks that ebb and flow based of the expectations the Fed will continue to buy bonds the economic recovery.
Then there's FedEx, which with rival UPS
So, it brought chills to the market when the chairman of FedEx, who should have a better-than-decent pulse on global spending, said that "tepid economic growth and customer preference for less costly international shipping services."
Whether Smith is right or wrong in relation to Bernanke's "upbeat" statement is not the issue here. The fact that Smith's somewhat gloomy outlook prompted analyst downgrades is a gross overreaction. Let's not get carried away.
All Smith is doing is what every great leader should do -- protecting his company. While I've always had a tremendous amount of respect for FedEx, I've also believed the Street's expectations for this company have been too high. Smith clearly agrees, and he's not about to set his company up for future disappointment.
Truth be told, despite FedEx's exceptional global assets and logistical infrastructure, the company has always underperformed in some very important categories such as free cash flow. That's not to say the company has been a disappointment. But there are a handful of stocks in this sector that have performed much better than FedEx over the past three years, including UPS and Old Dominion
Even though the company grew revenue 4% this quarter, Smith is not about to let high expectations from the Fed blind the fact that FedEx is still in the middle of some very important restructuring plans. Although the Express and Ground businesses did well this quarter, up 3% and 12%, respectively, FedEx didn't "deliver the goods" in terms of revenue per package. There was a 41% decline in operating income.
Granted, this decline included several charges related to the aforementioned restructuring plans. But adjusted operating income was flat. Again, this goes back to Smith's handling of the overall business and why I support his statements regarding FedEx's business. The downgrades notwithstanding, the way I see it it's best to be disappointed now in guidance than for investors to feel they were steered incorrectly should the company miss estimates later.
The good news is that FedEx's long-term commitment to better performance is real. For now, though, I don't see a scenario where the stock is going to move that drastically in either direction.
That's not to say FedEx doesn't have potential. But free cash flow growth, or lack thereof, makes it difficult for me to fall in love with the stock. I can be persuaded otherwise should shares fall further amid this overreaction.
At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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