FedEx’s Problems Do Not Signal A Recession (Or A Bear Stock Market)

He may be new at the job, but FedExFDX
CEO Raj Subramaniam should know better. With 2nd quarter 2022 sales up 5.5% over the same quarter in 2021, the declines in total earnings (-15%) and earnings per share (-18.6%) mean there is a serious company issue – not the global recession excuse he offered Jim Cramer on CNBC.

Here are the CEO’s comments contained in the company’s press release:

“Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S. We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations,” said Raj Subramaniam, FedEx Corporation president and chief executive officer. “While this performance is disappointing, we are aggressively accelerating cost reduction efforts and evaluating additional measures to enhance productivity, reduce variable costs, and implement structural cost-reduction initiatives. These efforts are aligned with the strategy we outlined in June, and I remain confident in achieving our fiscal year 2025 financial targets.”

The market certainly gave a no-confidence vote, sending FedEx down over 20%. That cut its diminishing market capitalization to $41B, 73% below UPS’s $152B.

Perhaps the global recession excuse would have been better received by Wall Street had it not been for FedEx’s extended underperformance. And the troubles aren’t simply Covid or inflation related. They even extend back to the 2019 growth period. Here is FedEx’s near-0% stock performance comparison with UPS and the S&P 500 over the past years (all results include dividend income).

The major takeaway: FedEx is neither a recession nor a bear stock market indicator

The company needs (and has needed) fixing, and now it is having to deal with rising costs (inflation), expanding competition (like the U.S. Postal Service improvements and Amazon’sAMZN
delivery services) and a capital market that is getting more discriminating regarding risk and weak sales/earnings. (And that means those overly distant “2025 financial targets” carry little weight. In fact, they imply a management casualness that raises risk even higher.)

Then there are these two bullet points in the press release:

• “Anticipated capital spending for fiscal year 2023 has been revised to $6.3 billion, compared to the prior forecast of $6.8 billion” [Meaning a cut of $0.5B]
• “The company reaffirms its previously announced plan to repurchase $1.5 billion of FedEx common stock in fiscal 2023”

So, in this challenging time, strategically and competitively, would you cut capital spending (company improvements) and reduce equity capital? Of course not.

Therefore, do not view the FedEx results, comments and action plans as signaling a global recession or a coming bear stock market. Instead, the former leading company’s trials and tribulations are whetting business schools’ interest in a coming FedEx case study of management failures.

The bottom line: Media reports continue to be misguided in this developing bull market

The lack of media understanding combined with the pursuit of anything negative really showed itself last week. Multiple interpretations of new information and market developments were overly simplistic, cherry-picked, and woe-is-us fodder for scary, bearish stories.

The good news is that Wall Street’s professionals are not swayed. They continue to distinguish strong company stocks from the mediocre and troubled ones. Importantly, given the changing and challenging conditions, that means this next bull market will likely be more selective instead of being a rising tide that lifts all boats. Therefore, we can expect actively-managed funds to outperform passive-index ones – perhaps significantly.