It’s hard to look anywhere these days without running into a stark warning about the global economy, courtesy of FedEx Corp. The company has been exerting its status as a bellwether company in recent weeks, warning about its earnings outlook, reporting a dip in quarterly earnings and cutting its full-year forecast – all by noting that the global economy is acting as the company’s biggest headwind.
In a conference call with analysts on Tuesday, FedEx’s chief executive Fred Smith sounded like an economic strategist: According to the Wall Street Journal, he warned that some observers were underestimating the impact of slowing Chinese exports, and new product launches by Apple Inc. and Microsoft Corp. were likely to provide little more than a temporary lift.
Because FedEx is a global shipping company, it is seen as having an on-the-ground view of how the global economy is functioning, and without any significant time lag. As an economic forecaster, the company is worth listening to.
The company is also cutting its global economic outlook. It now sees the global economy growing just 2.7 per cent next year, down from an earlier estimate of 3 per cent.
That’s very different from the most recent outlook published by the International Monetary Fund. The IMF in July trimmed its global growth forecast, but at 3.9 per cent that growth is still expected to be far stronger than FedEx’s outlook.
With FedEx warning that things aren’t so great in the economy, you have to wonder why the S&P 500 is within 1 per cent of a four-and-a-half year high. We pointed out in this space two weeks ago that the broader market in recent years has failed to heed FedEx signals: “FedEx’s share price successfully predicted the bear market decline that followed the financial crisis about five years ago. The shares began to retreat from their high point in February 2007, five months before the benchmark S&P 500 began to show any signs of concern. By the time the S&P 500 began to retreat, in October 2007, FedEx shares had already fallen 12 per cent.”
For what it’s worth, FedEx has fallen 10 per cent since February, while the S&P 500 last week rallied to its highest level since the end of 2007.
Kevin Crissey, an analyst at UBS, noted that in general freight transportation stocks have been reflecting the global economic slowdown – not just in China, but Europe and the United States as well: The stocks have been languishing this year as the S&P 500 climbs 16 per cent.
“If transport stocks had rallied with the market, we’d be very bearish on all of them,” he said in a note. “However, for the most part they haven’t and valuations are reasonable to cheap with bad news mostly telegraphed.”
So he asks: Are these stocks dead money or is there upside from current levels?
In the case of U.S. railway stocks, Mr. Crissey believes that dead money is the most likely scenario for now. He reduced is recommendation on Union Pacific, CSX Corp. and Norfolk Southern to “neutral.” And he cut his recommendation on Kansas City Southern to “sell.”
Meanwhile, analysts remain upbeat on FedEx in their recommendations, but have been reducing their 12-month target prices on the stock. On Wednesday, Goldman Sachs cut its target to $97 from $101. JPMorgan cuts its target to $99 from $104. And Barclays cut its target to $100 from $107.