In case you hadn't yet noticed how crazy today's market is, allow me to illustrate: Early Thursday morning, economic bellwether and Motley Fool Stock Advisor anchor FedEx (NYSE:FDX) missed on third-quarter earnings, missed on revenue, and dropped its fourth-quarter guidance below the consensus.
The stock promptly soared 6.5%.
Bigger slices, smaller pie
FedEx executives accentuated the positive: "We believe we are taking market share and will be well poised for substantial profitability increases once the economy recovers." They also predicted: "We probably have hit the bottom." Much as I'd love to hop on the optimism wagon with them, I have some reservations about their statements. Let's take them one at a time.
Everybody wins! ('cept DHL)
Beginning with their claim of increased market share, you may recall that UPS (NYSE:UPS) made a similar boast last quarter. But if both FedEx and UPS took share, whom did they take it from?
FedEx answered that question obliquely, by lamenting that the company's "market share increased as we believe we captured more than our fair share of former DHL traffic." This tells me that FedEx and UPS achieved share gains not from superb business performance -- but simply from one competitor folding its cards and walking away.
"We probably have hit the bottom"
So FedEx says. And there's some basis for that statement: "Inventories are now being bled off and they will have to be restocked beginning later in the year." Taking a quick survey of some of the bigger names in retail, I confirmed that inventories are indeed down at certain players -- off 9% year over year at Home Depot, for example; down 12% at Sears Holdings (NASDAQ:SHLD).
That said, not everyone is slimming down. Best Buy's (NYSE:BBY) inventories, for example, swelled by 10%. And at least two companies, known to patronize FedEx, PC Mall (NASDAQ:MALL) and J. Crew (NYSE:JCG), showed jumps of 5% and 18%, respectively. That suggests to me that the need to restock is not urgent -- or everywhere.
Foolish final thought
If that's not enough to scare you, consider that FedEx "expects earnings to be $0.45 to $0.70 per diluted share in the fourth quarter, excluding any one-time charges." Sounds good, but the company also said that "cost-reduction actions [will] result in fourth quarter charges of approximately $100 million, excluding any potential asset impairment charges."
In other words, FedEx expects to earn $0.45 to $0.70 ... minus a significant charge for cost-reduction actions ... minus unspecified "asset impairment charges." Work the math, and I see a real risk that FedEx could report a meager profit, and possibly an adjusted loss. Maybe not as bad as last year's Q4 loss, but bad enough to make me wonder whether we've really hit bottom yet.
