December 19 was not a happy day for FedEx shareholders. After an unsettling earnings report in which the company raised concerns over its flagging international business and lowered its profit outlook, FedEx was on pace for its worst day in a decade, with the stock down nearly 10% intraday:
Courtesy: CNBC
FedEx shares are down over 25% in the past month and 33% year-to-date, making it one of the worst performers in a struggling U.S. equities market. Meanwhile, the transports sector is down more than 10% in the past month – with FedEx, its largest holding, weighing down the sector and creating havoc on the day after the earnings announcement:
Courtesy: CNBC
Overall, the transports are underperforming the vast majority of U.S. market sectors (with oil/energy being the only real competition in that regard, though the housing market is also starting to show signs of weakness). FexEx’s abysmal earnings report is only adding fuel to a fire that’s consuming the entire sector.
FedEx CEO Fred Smith seems to be blaming politics for the company’s woes, saying that “Most of the issues that we’re dealing with today are induced by bad political choices – making a bad decision about a new tax, creating a tremendously difficult situation with Brexit, the immigration crisis in Germany, the mercantilism and state-owned enterprise initiatives in China, the tariffs that the United States put in unilaterally.”
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Blaming external factors is not unusual in corporate America when earnings turn sour, but the larger issue isn’t only about FedEx. Some analysts cite FedEx, and the transports sector more broadly, as a bellwether that indicates the health (or lack thereof) of the U.S. economy and markets.
If the global economic issues that Smith cited are indeed so problematic, can we expect to see company after company reporting poor earnings and guidance in 2019? Or is the underperformance merely a symptom of company- or industry-specific weakness?
Courtesy: Yahoo Finance
Looking beyond the excuses and reading between the lines, it’s not hard to discern in Smith’s words that there has, in fact, been a change in the macro landscape and that the slowdown in global growth is happening faster than expected. Morgan Stanley analyst Ravi Shanker reflects this sentiment, saying, “We recognize that global growth has slowed but we are very surprised by the magnitude of the headwind, which is what might be seen in a severe recession.”
Shanker further projected that “global growth concerns are also likely to get worse before they get better next year, which could mean more of a drag on FY20 EPS.” And while the entire equities market isn’t predicated on the performance of one company, the FedEx CEO’s excuses might serve as a caution to stock market investors generally.
Also worth bearing in mind is the classic Dow Theory, which posits that the U.S. transports and industrials sectors are leading indicators of the health of the overall economy and markets. Where the transports go, the markets may follow – and if that’s the case, then it might just be time to start hedging our bets.
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