Will FedEx Put A Damper On Demand Expectations?

FedEx warned Friday afternoon, cutting its fiscal Q4 earnings forecast for a second time this year (it warned earlier in March), citing increases in fuel prices, which had increased by 7% ($100 million) since giving its last estimate. The company now expects earnings for the quarter ending in May to be in the range of $1.45 to $1.50 a share, compared with previous forecast of $1.60 to $1.80 per share. Not surprisingly, the shares are down in Friday after-hours trading.

A few observations. First, for those that follow FedEx, this was somewhat to be expected given their earlier warning, but troublesome nonetheless. Furthermore, anytime a company warns on Friday afternoon, when they expect that everyone will be home with family or in The Hamptons, this is also sometimes a tell that the company is in trouble. This again is certainly not encouraging.

So what does this mean for the overall economy? Just recently we discussed how the Dow Transports were making a small rally earlier in the year, even as the Dow Industrials were relatively flat. While not a perfect indicator, the transports have at times been a leading indicator for the industrials. From a previous post we discussed why:

The logic behind the indicator being that if product is being shipped from supplier to retailer, than retailers are experiencing lower inventory and increased demand, eventually resulting in both the supplier and retailer booking revenues and earnings. The leading transportation indicator occurs since the transports are the first to signal demand, with the transportation companies also being the first to actually get paid for their services, resulting in higher valuations and stock prices. Both the suppliers and retailers have to wait a few months before seeing increased revenues at the retail level, or increases in accounts payable at the supplier level. As a result, increases in the transports can at times signal future revenues and stock prices for the industrial companies.

A current comparison of the charts for the DJIA and DJTA gives us no real conclusion:


As expected, there was a nice breakaway in transports in late January, followed a few months later in March by the industrials. The recent moves this week in the transports, while down, are still above the current uptrend line. Nonetheless, the industrials have appeared to roll over slightly. Certainly higher oil prices and recent new developments (i.e., problems) with some financial companies are most likely having some impact on the broader market.

Of course, FedEx, and even the over the road shipping companies, such as YRC Worldwide, may no longer tell the whole story. Given the strength and demand of the once maligned rails, it will be important to see results from companies such as Union Pacific, Burlington Northern Santa Fe, Canadian National Railway Company, and Norfork Southern before we can declare that shipping and transportation are weakening, and that lower demand will result in lower profits for the production-driven industrials. With the rails it is also important to see what is being shipped, given that recent agricultural and energy demands have seen an increase in business for moving coal and crude oil, along with wheat, corn, soybeans, and fertilizers. The energy commodities in particular, along with higher levels of corn production, will provide an increase in freight levels, while at the same time signaling pressure on the energy consuming industrials, thereby weakening the significants of the DJTA indicator.

Tickers: FDX, BNI, UNP, NSC, CNI