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FedEx Earnings Highlight Bumpy Economic Recovery

Daniel James
September 24, 2013

In a shocking move, the Fed decided to postpone tapering, sending stocks, bonds and commodities soaring. Yet the underlying message about the state of the global economy is none too encouraging, as it implies that the US economy may not yet be ready to stand on its own feet. FedEx's (NYSE: FDX) most recent earnings paint a similar picture. The company is generally considered a market bellwether, in part due to the scale of its operations. While it was a fairly upbeat report, the shift toward the company's cheaper transport options are not necessarily a good thing.

Ground growing, express slowing
Investors cheered FedEx's latest quarterly report, with earnings per share of $1.53 topping the $1.50 consensus and up 7% year-over-year. Revenue for the period came in at $11 billion for a 2% increase over last year's quarter, slightly beating the consensus. However, the company didn't follow this up with a raised outlook, as it still expects full-year EPS growth of 7%-13 %.

These numbers look pretty good. However, it's not FedEx's core express business that accounted for the growth. In fact, the segment's revenue growth was more or less flat for the period, but it managed a 14% increase in profit due to higher margins. It is now the ground segment that is driving growth.

Apparently, consumers are increasingly opting for the slower, cheaper ground transportation services. Overall segment revenue increased by 11%, with operating profit of $468 million around double that of the express division. The company now views this cheaper alternative as a prime avenue for growth, and has gotten to work on slashing air cargo capacity and trimming costs .

While this isn't necessarily bad news for FedEx, it doesn't bode particularly well for the world economy. If people opt for cheaper ways to send things, it means that they are less willing to spend money on transportation. As such, this reflects tightened consumer spending. Nevertheless, the company is fairly optimistic going forward, citing improving conditions in China and Europe .

Industry trends
(NYSE: UPS), FedEx's main competitor, also reported a slowdown in express shipping as consumers traded down for cheaper alternatives. Next Day Air declined by 1.5%, as export revenue per piece was down 3.4%. Like FedEx, UPS has now been forced to adapt to changing industry conditions, as forecasts for global economic growth have been l