Posted on Friday, September 23rd, 2011 | In Stocks to Watch
The shares FedEx Corporation (FDX) dropped to the lowest level since 2008 following the reduced profit outlook for fiscal 2012 (ending May 2012). The stock plunged 11% during whole day trading and closed at $66.58, down 8.17%.
Concurrent with its first quarter fiscal 2012 earnings release, the world's second-largest package delivery company slashed its fiscal 2012 earnings projection from $6.35–$6.85 to $6.25–$6.75 per share on reduced demand in the U.S. and Asia, uncertain economic growth and the recent turmoil in the financial markets.
From a segmental perspective, FedEx Ground and Freight are giving healthy performances but FedEx Express is struggling. The demand for Express services, particularly from Asia, continues to decline, resulting in lower shipments of goods. This decline is far more than the synergies from yield improvement and several cost efficiency measures.
Although management does not expect a “double dip” recession, it also realizes that the economy will not revive any time soon. It expects sluggish growth to prevail overall on lack of confidence on U.S. and European policymakers to effectively handle the present situation.
Shipping and the package companies, including FedEx, might face severe challenges like the major railroads. Lower mining activities and a sudden drop in demand from the Asian markets have resulted in a major setback to major railroads companies such as Alpha Natural Resources (ANR), Walter Energy (WLT), CSX Corporation (CSX) and Norfolk Southern (NSC).
Besides, there have been weak economic indicators from major countries including China, Europe and the U.S. that intensified fears of a new recession. Greece is in the danger of defaulting on its debt, should it fail to receive additional funds from overseas in the coming weeks. In the U.S., the employment level is yet to climb up.
While FedEx caused investor disappointment yesterday, the world's largest package delivery company United Parcel Services (UPS) continues to expect healthy revenue and earnings above previous peak levels. United Parcel maintains its expectation of record earnings in fiscal 2011 (ending December 2011), despite the prevailing economic uncertainty.
We are currently reiterating our long-term Neutral rating on FedEx. The stock retains a Zacks #3 (Hold) Rank for the short term.
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