FedEx Bludgeoned On Grievous Guide Down, But Is The Trade War Really The Problem?

Bellwether alert!

Generally speaking, there needs to be a discernible connection to the macro narrative for individual earnings results to feature in these pages. FedEx fits that description.

The courier has, at various intervals going back to last year, found itself beset by concerns tied to the trade war. Those concerns haven’t been limited to generic global growth jitters. Over the summer, the company stumbled into Beijing’s crosshairs thanks to an at times farcical dispute over rerouted Huawei shipments and, more recently, illegal knives.

As you can see, the shares ran into some trouble after the close on Tuesday, when the company cut its 2020 profit outlook.

Specifically, FedEx now sees FY2020 earnings of $11.00 to $13.00 per share, which translates into a 16% decline, compared to the previous guidance of a “mid-single-digit” drop. (So, yeah, some would call that a disaster.)

“FedEx is lowering its fiscal 2020 earnings forecast as the company’s revenue outlook has been reduced due to increased trade tensions and additional weakening of global economic conditions since the company’s initial fiscal 2020 forecast in June”, the courier said Tuesday, adding that the revised outlook “also reflects increased FedEx Ground costs and August’s loss of FedEx Ground business from a large customer”. The “large customer” is obviously Amazon.

The release also contains the obligatory language around the TNT integration. To wit:

We have incurred and expect to incur significant expenses through fiscal 2021, and may incur additional expenses thereafter, in connection with our integration of TNT Express. We have adjusted our first quarter fiscal 2020 and 2019 consolidated financial measures to exclude TNT Express integration expenses because we generally would not incur such expenses as part of our continuing operations. The integration expenses are predominantly incremental costs directly associated with the integration of TNT Express, including professional and legal fees, salaries and employee benefits, travel and advertising expenses. Internal salaries and employee benefits are included only to the extent the individuals are assigned full-time to integration activities. The integration expenses also include any restructuring charges at TNT Express.

The company also talked about cost cutting initiatives, which is either a good sign or a bad sign, depending on your penchant for sarcastic derision. “FedEx is implementing additional cost-reduction initiatives to mitigate the effects of macroeconomic uncertainty, including post-peak reductions to the global FedEx Express air network to better match capacity with demand”, CFO Alan Graf said, before insisting that the company is still focused on making “strategic investments to improve capabilities and efficiency”.

Whatever the case, nobody was in the mood for excuses after the bell. The after hours losses, assuming they bleed over into the regular session on Wednesday, would mean the shares wiping out their 2019 gain.

This could be one case where the Trump administration’s go-to line about corporate management teams using the trade war as an excuse for poor execution actually does apply.

“There are enough management execution missteps to severely undercut the company’s macro significance”, Bloomberg’s Andrew Cinko wrote after the bell.

There’s more than a little evidence to support that contention, but really, all you need is the following chart which shows you how the company’s figurative and literal fortunes have diverged from those of UPS since the lows hit on Christmas Eve day when Donald Trump crashed the market by insulting Jerome Powell’s golf game on Twitter.