With the Dow at all-time highs, it’s easy to think that the world economy is doing rather well. The market has largely shrugged off the concerns surrounding the tiny-island nation of Cyprus, and seems to be continuing its drift higher. However, all is not well at all. Results released by major economic bellwethers FedEx Corporation (NYSE:FDX) and Caterpillar Inc. (NYSE:CAT) in recent days should be deeply worrying for investors, and set off a number of alarm bells about the state of the global economy. These are both large, powerful multinational companies with strong international exposure. If they aren’t doing well, there’s a good chance that other companies will come up with similar results.
FedEx earnings report
FedEx just reported a fairly large earnings miss, and was subsequently punished for about 7% by investors. Diluted EPS came in at $1.23 versus an analyst consensus of $1.38 for a miss of about 11%. The company did beat on the top line, however, with revenues of $11 billion versus expectations of about $10.85 billion. According to management, FedEx Corporation (NYSE:FDX) had a rough quarter with “continued weakness in international air-freight markets, pressure on yields due to industry overcapacity and customers selecting less expensive and slower-transit services.” This doesn’t sound too good.
Some more frightening numbers for you: operating income was down 28% and the operating margin fell 240 basis points. Net income was down 31% to $361 million, largely to due to weakness in the Express division amid shifting consumer preferences towards lower-yielding international services, which has accelerated faster than the company’s prior expectations. The Ground division was a bit of a bright spot in the report, with a 17% operating margin and a 10% average-volume increase. The division saw a strong 11% increase in revenue.
The company is now undertaking a number of measures to turn around the Express segment, including a reduction of capacity in Asia. These measures appear crucial for FedEx Corporation (NYSE:FDX), as the Express division continues to generate most of the firm’s revenue. The company has moreover lowered its guidance for the full year with expected EPS of $6.00 to $6.20 versus earlier guidance of $6.20 to $6.60.
FedEx´s number one competitor, United Parcel Service, Inc. (NYSE:UPS), has also been delivering disappointing results, which points to a more general weakness in the delivery service market. With three misses in 2012, investors are becoming increasingly worried about the company. Despite record full year results, the company missed its estimate by 5 cents, with management citing weak global trade as a drag on profits. The international package segment was especially weak with an operating loss of $442 million on a US GAAP basis. The company does remain optimistic on its 2013 results however, expecting an increase of 6 to 12% over the 2012 adjusted EPS results.