FedEx Earnings Warning: Recession Harbinger or Single-Stock Hiccup? – Kiplinger’s Personal Finance

Investors have plenty of worries – chief among them inflation and a potential recession. But the engine that ultimately drives the stock market is corporate profits. As long as earnings growth stays on track, then corporate America—and by extension, your stock portfolio—remains on solid ground.

Which is why the recent earnings preview from FedEx (FDX) was so unnerving. While the official report for the quarter ended August 31 comes out Thursday, FedEx warned on September 15 that it would have bad news, with quarterly results severely impacted deteriorating economic trends in Asia, Europe and the U.S. FedEx stock was immediately penalized, and is down more than 20% since this pre-announcement.

The key question for every investor is whether the shipping giant is suffering from a company-specific malaise or whether FedEx’s problems are a broad-market bellwether portending widespread doom. “FedEx is no ordinary economic actor, as its business literally touches every corner of the global economy” says Sheraz Mian, director of research for Zacks, an investment research firm.

A Downgrade for FDX

Analyst Colin Scarola, at investment research firm CFRA, suspects that part of the problem at FedEx is that it failed to adjust operations in its Express division (50% of revenues) as more international passenger flights, which transport some air freight as well, came back online after the pandemic-related slowdown, raising competition. “We don’t doubt that some of the poor performance is related to ongoing global economic headwinds and high inflation worldwide. But the extent of the decline at Express leads us to believe that poor operational execution is also at play,” says Scarola, who has cut his firm’s rating of FedEx from Strong Buy to Hold.

Still, the broader challenges facing FedEx are by no means unique, says Zacks’ Mian. “Company-specific challenges notwithstanding, we know that the macroeconomic landscape is expected to be tougher. Europe is practically in a recession already and China has held itself down with its zero-Covid policy. The U.S. economy has been faring better, but everyone knows there is pain ahead.” 

You can see that pain reflected in the diminishing earnings estimates from a consensus of Wall Street analysts for companies in the S&P 500 stock index. According to Zacks, analysts expect third-quarter profits (for the three-month period through September) to be up just 1.2%, with revenues increasing 9.1%, compared to the same quarter a year ago. For context, in the pandemic-rebound third quarter of 2021, companies logged year-over-year earnings growth of 41.4%, according to Zacks, on revenue growth of 17.5%. And it gets worse: Without counting outsized earnings from the energy sector, estimated third-quarter earnings growth for the remainder of the S&P 500 would be down 5.5% from the same period a year earlier.

Refinitiv, …….


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