FedEx (FDX) Earnings Warning: Recession Harbinger or Single-Stock Hiccup?


Investors have many concerns – above all inflation and a possible recession. But the engine that ultimately drives the stock market is corporate earnings. As long as earnings growth stays on track, American companies – and by extension your stock portfolio – will remain solid.

This is why the recent FedEx (FDX) earnings preview was so troubling. While the official report for the quarter ended August 31 is out on Thursday, on September 15 FedEx warned of bad news as quarterly results severely impacted deteriorating economic trends in Asia, Europe and the US. FedEx stock was immediately punished and is down more than 20% since this announcement.

The key question for any investor is whether the shipping giant is suffering from a company-specific malaise, or whether FedEx’s woes are a broader market indicator pointing to a widespread downfall. “FedEx is no ordinary economic player as its business touches literally every corner of the global economy,” said Sheraz Mian, director of research at Zacks, an investment research firm.

A downgrade for FDX

Analyst Colin Scarola of investment research firm CFRA suspects part of the problem at FedEx is that it hasn’t scaled up operations in its express division (50% of revenue) as more international passenger flights, which also carry air freight , came back online after the pandemic-related slowdown, increasing competition. “We have no doubt that some of the poor performance is related to ongoing global economic headwinds and high global inflation. But the magnitude of the decline at Express leads us to believe poor operational execution is also playing a role,” said Scarola, who downgraded his firm’s FedEx rating from Strong Buy to Hold.

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Still, the broader challenges facing FedEx are by no means unique, says Mian von Zacks. “Regardless of the company-specific challenges, we know that the macroeconomic environment is likely to become more difficult. Europe is already in virtual recession and China is holding back on its zero-Covid policy. The US economy is doing better, but everyone knows pain is ahead.”

You can see that pain reflected in the falling consensus Wall Street analyst earnings estimates for companies in the S&P 500 stock index. According to Zacks, analysts expect third-quarter earnings (for the three-month period ended September) to rise just 1.2% and revenue to rise 9.1% from the year-ago quarter. In the context of the pandemic’s recovery in the third quarter of 2021, the companies reported annual earnings growth of 41.4% on sales growth of 17.5%, according to Zacks. Worse still, excluding outsized gains from the energy sector, estimated third-quarter earnings growth for the rest of the S&P 500 would be Low 5.5% compared to the same period last year.

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Refinitiv, another earnings tracker, has a slightly more bullish outlook for the third quarter, with analysts it polled calling for a 5% growth rate for S&P 500 earnings from third-quarter 2021 levels. Excluding energy gains, Refinitiv forecasts a 1.7% decline in growth. Earnings prospects have quickly turned bleak — in July, analysts had expected S&P 500 earnings to rise more than 11% for the third quarter as a whole. Last October they called for growth of 14.5%.

Pain in many sectors (but not energy)

For the full year of 2022, Refinitiv reports consensus estimates of 7.9% overall earnings growth for S&P 500 companies, compared to a explosive 52% in 2021. But the upbeat outlook for full-year 2022 masks some pain in some sectors: earnings growth is evident 12.2% decline for financial companies; 11.8% for communications services companies and 4.3% for consumer discretionary, which offers non-essential consumer goods and services (think retail and restaurants, for example). Prices).

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Keep an eye out for other earnings trailblazers from companies reporting this week, including IT consultancy Accenture (ACN) and retail giant Costco (COST).

And while the deteriorating earnings outlook calls for caution overall, it’s too early to despair. In a recent client note entitled “Earnings Estimates Collapse,” Credit Suisse Chief Strategist Jonathan Golub acknowledged that many investors are interpreting the recent fall in estimates as a harbinger of a recession. But his work shows that during periods of high inflation, including 1973, 1980, and 1981, incomes peaked on average just two months before the onset of the recession. “With earnings growth forecasts still positive,” he concludes, “revisions need to fall much more sharply to signal an economic contraction.”





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