Markets & Finance

FedEx: U.S. Growth Is 'Sluggish'


The shipping company is pessimistic about the U.S. economy, particularly the industrial sector

FedEx (FDX) executives said Thursday that the U.S. economy looks "sluggish" and has been hurt by the poor housing market, financial market turmoil and high fuel costs.

They should know. As the shipping link to millions of businesses, and even more online consumers, FedEx is regarded by many as an excellent gauge of economic activity. So investors and economists alike were listening to FedEx' latest quarterly results and outlook.

FedEx's revenues rose 8% from a year ago to $9.2 billion in the first quarter. Profit margins improved in FedEx's express and ground segments, but fell in its freight business.

FedEx earned $1.58 per share in its first quarter, up from $1.53 a year ago and the $1.54 that analysts were expecting. Those results impressed analysts, but its longer-term outlook was not so rosy. Citing the weak U.S. economy, FedEx cut its earnings estimate for fiscal 2008 by 4%.

In prior quarters, FedEx execs had expected the U.S. economy to improve in the late summer or early fall. "We now know that is not the case," chief financial officer Alan B. Graf Jr. told analysts. "In fact, we believe that U.S. [gross domestic product] will grow less than 3% ... for the rest of fiscal 2008," which ends May 31.

"The economy's not good," says Morgan Keegan analyst Arthur Hatfield. The U.S. economy, especially the industrial sector, is showing the most weakness. FedEx's freight shipments have been hit hardest, a sign that "the industrial economy has slowed," Hatfield says.

The daily volume of U.S. domestic package deliveries fell 1% from a year ago. The average daily freight volume fell 6% in the U.S.

The bright spots for FedEx are overseas. It is buying smaller shipping companies in fast-growing countries, and expanding its existing international operations. Morningstar (MORN) analyst Keith Schoonmaker notes that FedEx leads the industry with 30 flights per week between the U.S. and China. It offers overnight delivery between China and India, and express delivery among more than 200 cities. "It has built a massive international network that's difficult to duplicate, giving the company a narrow economic moat," Schoonmaker wrote this month. "We expect the firm to exploit these advantages for years to come."

"Outside of the United States, the economy is generally solid," FedEx chairman, president and chief executive Frederick W. Smith said in a statement. He added: "I continue to believe that FedEx will, over the long-term, reap the rewards of our strategy of investing in key growth markets and strengthening and expanding our worldwide networks."

But U.S. shipments still make up about 75% of FedEx's business, and that should concern FedEx investors. In mid-afternoon trading on Sept. 20, FedEx shares were trading at $105.30, down 2%.

FedEx's stock has an attractive valuation, trading at 15 times expected 2008 earnings, according to J.P. Morgan (JPM) analyst Thomas R. Wadewitz. But analysts don't expect any movement in shares soon.

Wadewitz listed the problems: Higher fuel prices, a drop-off in freight business and "potential macro headwinds from a slower U.S. economy." "We don't see a catalyst for [FedEx] stock," he wrote in a note on Sept. 20.

Steverman is a reporter for BusinessWeek's Investing channel.

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