Wednesday, June 20, 2007

FedEx Reports Earnings

From Reuters:

Package delivery company FedEx Corp. (FDX.N: Quote, Profile , Research) on Wednesday reported a profit and gave a quarterly forecast that missed expectations, citing slowing U.S. economic growth, but a solid full-year outlook sent its stock up more than 2 percent.

"The weakened industrial sector is currently limiting demand for transportation services," Chief Executive Officer Frederick Smith said in a statement. "But we expect the U.S. economy to begin to show modest year-over-year improvement in the late summer to early fall time frame."

The Memphis, Tn.-based company said net income for its 2007 fiscal fourth quarter ending May 31 rose 7 percent to $610 million, or $1.96 a share, compared with $568 million, or $1.82, a year earlier.

My guess is this is the blueprint for upcoming earnings releases. They will follow this blueprint:

1.) Earnings were a bit weaker than expected.
2.) Weaker earnings are to be expected when the economy hits a soft patch.
3.) Although earnings were weaker they are still positive, just not by as much as we would like.
4.) Things look like they are picking up.
5.) By the end of the year things should be fair to good.

Right now the evidence suggests a mild second part of the year. On the negative side we have housing and the trade deficit subtracting from growth. On the positive side we have consumer spending, an uptick in business activity and strong business real estate investment. Employment is fair but not great.

It's important to reiterate what this release says about Dow Theory. Dow theory says that transports and industrials have to confirm each other. If business is more profitable they will have to ship more stuff. The reverse is also true. FedEx is one of the largest shippers on the planet, so their earnings give us a good guide to what is happening in business. Fed Ex's net increase 7% -- not great, but not bad either. People are shipping, but not in as large a number as a few months ago.

From a market perspective, releases like this would indicate a range bound market, which would also coincide with the summer doldrums. Earnings aren't bad enough to sell, but not strong enough to buy.