Wednesday, June 22, 2011

FedEx Bullish Conference Call and Growth Forecasts

FedEx gave $FDX gave Q4 results and the stock markets cheered them by sending FedEx stock 2.6% higher. Essentialy, FedEx is a cyclical company and rather like its rival UPS $UPS it should be seen as a play on global growth. Indeed, this issue was articulated in more detail in this linked article which should search as a good reference point.

In summary, both FedEx and UPS are not investments I would make right now. This is not a negative call on global growth, rather, an expression of my view that there are better value plays which will give directional exposure to global growth. In addition, I believe there are better growth plays which can generate superior returns to buying either of these stocks. Neither have the 'outer' of a takeover, nor great cash flow yields with which to pay high dividends. UPS is currently yielding around 3% but that it is not particularly attractive.

More interesting, is to compare what FedEx where saying about the global economy and compare it with Ben Bernanke's statement today. I'll come back to this point later.

Growth Prospects?

For both FedEx and UPS, there appear to be some upside prospects, at least if FedEx's conference call is to be believed. I will summarize some of the key 'take-aways' from the conference call below.
  • Near term ecoomic weakness caused by previously high energy costs and the disaster in Japan
  • A stronger second half as consumption picks up and energy costs fall
  • Growth to be continued to be led by industrial expansion
  • Growth in Asia/Pacific and China seen as showing continuing strength and the current environment described as being 'very positive'
  • Currently low Inventory/Sales ratio in the supply chain are seen as boding well for future growth
Both companies should see the benefit from lower energy costs in their margins and also in their revenue numbers as high energy and food costs act as a kind of 'tax' on discretionary spending.

Comparing FedEx with the Fed?

No not Roger Federer, but Ben Bernanke. In the conference call, FedEx gave some specific US GDP growth forecasts which will be interesting to compare with the recent downward revisions to GDP  forecasts by the Federal Reserve.

US GDP ForecastQ2 2011Q3 2011Q4 201120112012
Federal Reserve January3.4-3.9%
Federal Reserve April3-1-3.3%3.5-4.2%
Federal Reserve Revised2.7-2.9%3.3-3.7%
FedEx Forecast1.9%3.5%3.4%2.5%3.0%

Interestingly, the FedEx forecasts are somewhat weaker than the Federal Reserve forecasts, even with the lowering of the numbers by the latter. However, they are both indicating stronger growth in the second half and in particular with consumption spending coming back. I consider these strong indicators for stock pickers to take advantage of.

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