How badly did FedEx Corp. stock get beaten up during the global equities sell-off of Sept. 22?
So badly that David G. Ross, analyst for Stifel, Nicolaus & Co., wrote in a research note that traders and investors didn't just sell FedEx shares. The market, in his words, "continued to puke the stock."
Ross' depiction was as accurate as it was vivid. The Memphis-based giant announced before the U.S. market opened last Thursday that its fiscal first quarter results had come in slightly below the company's expectations. This announcement compelled some traders, speculators, and investors to begin selling the company's stock in droves the minute they heard the opening bell. At one point during the trading day, FedEx stock had fallen to $64.55, a decline of almost $8 a share from the prior day's close. At the close of Sept. 22, the stock had settled at $66.58. The stock is now more than $30 a share below its 52-week high of $98.33 set on July 7.
The reason why Fedex stock was hammered on Sept. 22 was the surprisingly subpar performance of the company's air express division, which represents close to 60 percent of FedEx's revenue and is seen as a proxy for U.S. and global economic activity. Domestic express volumes fell 3 percent year-over-year, while the company's "international priority" business—which accounts for nearly one-third of all of FedEx's revenue—contracted by 4 percent due to a slowdown of airfreight volumes out of Asia. The sequential (quarter over quarter) decline of 8.4 percent in international volumes was the biggest such drop in at least 10 years, according to Jon A. Langenfeld, analyst at Robert W. Baird & Co.
The weakness in FedEx's international air business reflects a continued deterioration in global airfreight volumes. Langenfeld said in a research note that industry contacts have noted persistent weakness in Asian air export volumes with declines continuing into September, which is the first month of FedEx's fiscal second quarter.
Gary Schultheis, senior vice president, airfreight Americas for DHL Global Forwarding, the world's largest airfreight forwarder, echoes those comments. "We have not seen any major increase in tonnage out of Asia," he said. "As a result, we question whether there will be a peak [shipping] season or not. If there is one, it will be very short."
not all bad news
While the market was fixated on FedEx's disappointing air express numbers, they chose to ignore what were solid results from its other operating units. The company's ground parcel unit reported a 16-percent increase in revenue, with volumes up 5 percent and yields—driven by a stronger parcel-pricing environment—up 9 percent. FedEx Freight, the company's less-than-truckload division, reported a 5-percent revenue increase, with yields up 11 percent on a 7-percent drop in volumes as the unit continued to shed unprofitable or marginally profitable business.
Ross, the Stifel, Nicolaus analyst, said the Thursday selloff reflected the market's "disbelief" in the company's revised earnings-per-share targets for its 2012 fiscal year. In spite of the air freight division's recent performance, Fedex has reduced its original projections for 2012 by only 1.5 percent from those it made in June.
Unlike the market, Ross seems to agree with Fedex's reassessment. He said Stifel, Nicolaus sees "this period of market turmoil as a good time to take or increase a position in a global growth company that is gaining market share, with good management and strong pricing." Ross set a 12-month price target of $111 on FedEx shares.
William Greene, lead transportation analyst for Morgan Stanley & Co., said investors reacted negatively, believing that the company's full year earnings-per-share results will be at the low end of expectations. But Greene said FedEx management is betting on a re-acceleration of volumes in the second half of its fiscal year after what will likely be a second fiscal quarter as sluggish as the first.
Greene said investors should remain cautious over the near term as the macroeconomic environment bottoms out. However, he said that FedEx's stock price already reflects a conservative outlook for the business and that an expected improvement in international business should help boost the company's valuation.
Langenfeld of Robert W. Baird also advanced a bullish outlook, saying improved domestic parcel demand and pricing trends, combined with rising barriers to entry in the global express industry, outweigh near-term concerns about industry and macroeconomic weakness.
Noting that global air cargo volumes should rise by 5 percent to 6 percent a year over the long term, Langenfeld said FedEx should benefit from companies' continued push for globalization and market demand for sophisticated integrated logistics offerings supported by a strong information technology network.
Loxo/Planzer