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FedEx comes down to earth
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3:46 PM 9/5/2012 - MarketWatch
SAN FRANCISCO (MarketWatch) -- FedEx Corp. sent a shudder through the market Wednesday after warning that its parcel-delivery business was not delivering the profit it had expected just a couple of months ago.
In a terse note to investors sent out late Tuesday, FedEx cut its fiscal first-quarter earnings estimate. citing (what else?) the "weakness in the global economy."
The company didn't offer many details, but analysts turned immediately to its express-delivery service, concluding that businesses are less willing to rush packages by air when surface rates are so much cheaper. That, of course, assumes they have something to send. Volumes have come way off in Europe and demand in Asia is also slowing.
This hardly shocks folks who follow the industry. The International Air Transport Association delivered essentially the same message Thursday when it reported July global air-freight demand fell 3.2% from a year ago.
"A large part of that decline was due to a comparison with a relatively strong July last year, but overall the trend in air freight is weak, in line with subdued world trade growth," the IATA said.
We also got a little taste of the slowdown in July, when United Parcel Service Inc.'s quarterly results fell short of Wall Street expectations. The company also cut its full-year earnings outlook. Read about UPS's latest quarter.
So FedEx's warning merely brings its share price closer to earth.
You know who else is grounded? Trains. That might be a worthy consideration for investors keeping their money in the transport sector.
Warren Buffett, for one, is a known fan of the rails. He scooped up the Burlington Northern Santa Fe railroad and folded it into his Berkshire Hathaway Inc. empire in 2009.
On Tuesday, BNSF announced it was expanding its capacity to carry up to 1 million barrels of oil shale a day out of North Dakota and Montana.
The oil-shale boom practically fell into BNSF's lap. Not all railroads have been as lucky. Because of the drought, agricultural shipments this year are likely to be down. Coal shipments are also way down, as coal struggles to compete with natural gas at the burner tip of the nation's power plants. There's also good reason to believe freight demand ahead of the holidays will be down this year.
But there's still a compelling case to be made for ground transportation. It's cheaper. It's slower too, but so is the economy. Speed has lost some of its luster, and with it the premium pricing. In other words, park the plane; take the rail.
Which railroads are doing best? Those less exposed to coal hauling. That rules out CSX Corp. and Norfolk Southern Corp. , and you can see it in their share prices.
Over the past 12 months, CSX shares are up 3.8%; Norfolk Southern shares are up 7%. Union Pacific Corp. and Kansas City Southern have been among the group's better performers, up 35% and 49% respectively, and are poised to make further headway if freight volumes pick up in the final months of the year, as they usually do.
But seeing upside in railroads doesn't mean Wall Street has soured completely on air freight. Several analysts see the fall as prime time for a rebound in the business. So if FedEx executives seem overly cautious in their updated earnings guidance, they could be setting up a nice rebound for the stock as the holidays approach.
Hey, it wouldn't be the first time a company went this route to make itself look resilient.
-- Jim Jelter
