FedEx: Economic Weathervane

Give FedEx (NYSE: FDX  ) credit; it delivered what it promised ... sorta. After preannouncing fiscal-third-quarter profits from $0.70 to $0.90 last month, the company reported the actual number yesterday: $0.73 per share.

Problem is, $0.73 probably isn't enough to lift FedEx to the per-share profit of $5 to $5.30 that it had previously promised for the full year. With three quarters already under its fiscal-year belt, FedEx has racked up only $2.82 per share in profit. So unless Q4 turns out to be nearly as profitable as the three preceding quarters combined, FedEx is probably going to fall short of $5. (Indeed, management walked back guidance yesterday, saying that at best it will earn $5 in "adjusted" profits.)

FedEx investors' problems don't end there. You see, the company's still sticking with its story that an improving global economy will help FedEx fly higher. UPS (NYSE: UPS  ) gave similarly bullish guidance this week. Citing "strong demand for our services," FedEx CEO Fred Smith says we can expect to see solid revenue gains in Q4.

But here's the thing: We already saw "solid revenue gains" in Q3, and it didn't help much. In the fiscal third quarter it just reported, FedEx grew its global sales 11%, to $9.7 billion. But far from the margin improvement you might expect to see from greater scale of operations, FedEx actually reported a drop in operating margins, to 4.1%. Operating income declined 6%, and by the time we reach the bottom line, FedEx ended up looking 3% less profitable than it was one year ago.

Good news and bad news
In large part, FedEx blames the weather for this setback, noting that winter storms disrupted traffic on 27 days in Q3 -- hamstringing FedEx on a full third of the days it was doing business. Barring a streak of freak April blizzards, those difficulties are unlikely to repeat in Q4. The bad news is that any number of other threats could emerge. Just off the top of Fred Smith's head, "earnings could be affected by" ...

  • "The ongoing political turmoil in the Middle East and North Africa."
  • "The near-term impact of the earthquake and tsunami in Japan on operational costs, shipping patterns and the global economy."
  • The eternal bugaboo of transportation stocks -- higher fuel costs.

With $100-a-barrel oil looking increasingly like the norm, transportation companies already have their hands full. If any of these above factors prove to be overwhelming in scale, transport stalwarts like Arkansas Best (NYSE: ABFS  ) , Expeditors International of Washington (NYSE: EXPD  ) , and JB Hunt Transport (NYSE: JBHT  ) could also be in for a rude awakening.

Foolish takeaway
In short, if everything goes right for FedEx, this stock may be appropriately priced at about 21 times earnings, with 16% long-term growth projected. But everything won't go right.

The good news? When the inevitable happens, this stock could get even cheaper.

Want to stay up to date on the latest news involving your favorite stocks? Click here to add FedEx to your free, personalized watchlist.

Fool contributor Rich Smith has no position in any stocks named above, but FedEx is a Motley Fool Stock Advisor recommendation, and The Fool owns shares of both FedEx and UPS. The Motley Fool has a disclosure policy.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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