Published June 25, 2010

FedEx numbers tell of better days ahead
CEO sees very good 2011, forecasts solid growth in the firm's European business


By ANDREW MARKS
NEW YORK CORRESPONDENT


SOME 100 years ago, Charles Dow, the founder of Dow Jones & Co, said that if railways are busy 'it's a good sign for the economy and for the stockmarket'.


Good bellwether:

US-based FedEx, the world's largest commercial transport firm, derives more than 25 per cent of its income from foreign operations
And if global courier giant FedEx is the 21st-century version of the railroad behemoths of Mr Dow's time, investors wondering how the economic recovery is faring and which way the seesaw market will ultimately tip in the coming weeks should take heart in the bullish message to be found in one of the best leading indicators of the market.

The positives in FedEx's fiscal fourth-quarter earnings report released on Wednesday were largely ignored by a market still fixated on headline-driven worries.

But the market has begun the slow, grinding shift away from those headline-driven fears of a global economic slowdown and a double-dip recession for the US economy lately. And the numbers in FedEx's report have many of Wall Street's sharpest minds looking forward to the day when investors re-focus on the economic and profit numbers that ultimately drive markets.

Why is FedEx such a good bellwether? Not only is it a giant in the United States, it also derives more than a quarter of its income from foreign operations - hello, eurozone, hello fears that China's attempts to muzzle runaway growth will hurt the global economy.

When the economy is in the doldrums, FedEx has to cut employee benefits and mothball aircraft. But when things are humming, it revs its engines to accommodate the need to ship ever larger quantities of parcels, envelopes and boxes.

Well, the world's largest commercial transport company put more planes in the air, increased employee benefits and registered a big increase in sales worldwide in Q4 to May 31. And FedEx Express president and CEO Dave Bronczek said FedEx has seen rises, rather than falls, in overnight shipping from Europe - despite the region's economic crisis.

Avondale Partners analyst Don Broughton wrote: 'We are impressed with the company's outlook (which includes non-cash pension headwinds) and would use any opportunity to purchase shares at these levels.' He noted that FedEx projects US gross domestic product (GDP) growth of 3.2 per cent, worldwide GDP growth of 3.1 per cent and a 5 per cent increase in US industrial production.

'International airfreight load factors are higher than they have been since 2000,' he said. 'Re-stocking has begun.'
If FedEx's earnings and outlook can be considered an outlier for the rest of the S&P 500, before the Q2 earnings-reporting season kicking into high gear in three weeks, investors should have good news to look forward to in mid-July.

'The message for the financial markets from FedEx is a very positive one,' said Hugh Johnson, chief investment strategist at Johnson Illington Advisors, pointing to a strong balance sheet and a huge jump in revenue that blew away consensus estimates. 'The fact that it wasn't received very positively by investors just shows how much other issues continue to overwhelm fundamentals.'

Indeed, shares of FedEx fell 6 per cent following the company's report, which narrowly beat Wall Street earnings estimates - by a penny - and a cautiously worded outlook from FedEx chairman and chief executive Fred Smith.

Investors focused on an operating loss at FedEx Freight and rising operating expenses incurred as business picks up, such as higher aircraft maintenance expenses to get mothballed aircraft flying again to meet rising demand for its services, rather than a 20 per cent rise in revenues.

FedEx offered cautious but optimistic guidance, and investors chose to focus on the caution rather than the many positives. Even the rising costs numbers are bullish.

Companies have to spend more when they ramp up business. These are expenses that come with a recovery, and the fundamental point in FedEx's report is that the recovery remains on track.

Indeed, during the company's conference call, Mr Smith said he anticipates a very good 2011, forecasting solid growth in the group's European business.
'FedEx's numbers confirm for me the positive story I see for the economy in the second half of the year,' said Mr Johnson, who anticipates a 10 per cent rise in the market over the next six months. 'We've never expected a powerful, 'V'-shape economic recovery, but certainly a 'U'-shape one, and that's what we're getting and what the economic data and FedEx's result and outlook are telling us to expect,' he said.