This morning the irresistible force of enthusiasm represented by the all-time highs of the Dow Jones Transportation Average (^DJT) met the immovable reality of global economic weakness when FedEx (FDX) reported a stink-bomb of a quarter. The global shipping juggernaut came in at $1.23 in earnings per share on revenues of $11 billion compared to consensus estimates of $1.38 and $10.85 billion, respectively.
"The third quarter was very challenging due to continued weakness in international air freight markets, pressure on yields due to industry overcapacity and customers selecting less expensive and slower transit services," said company founder & CEO Fred Smith in the press release. Smith went on to say the company will decrease capacity to Asia and ramp up cost reduction efforts.
As might be expected from such a large miss and dour guidance, FDX shares are weak in early trading Wednesday but still up over 10% for the year. Yahoo! Finance senior columnist Mike Santoli and I discussed what the bellwether's results mean for the broader market.
Santoli says the million dollar question is whether FedEx customers migrating to lower margin, slower delivery products is a function of the economic cycle or a seismic shift in their corporate clients. For ages FedEx has been satisfying customers' sense of urgency by getting packages delivered overnight.
The fact that the shipper itself says it's accelerating cost-cutting suggests customers are doing the same, in some cases at the expense of FedEx.
The ray of light for investors who are not long FDX is that International weakness doesn't come as much of a surprise, even if the magnitude of the earnings miss does. When you talk to investors, Santoli says the theme has been getting long stocks of companies levered to housing and consumer spending in the U.S. FedEx may ship a large portion of goods purchased online in the States, but the company had gotten its best margins Internationally. Apparently not anymore.
Between the news out of Europe, weakness in China and the miserable price action in commodity goods like copper, FedEx's international woes couldn't have come as much of a shock. The concern is that such weakness becomes a theme next month when more companies start reporting in earnest.
"You had these clues that the global economy is not exactly in boom mode," notes Santoli. "Maybe at least companies are willing to show some pain going into this reporting season."