In 1975, Fred Smith, the founder of Fedex [NYSE:FDX], made a desperate trip to Las Vegas.
His two year old company was haemorrhaging money and in deep trouble.
Desperate to pay the bills, he took his last $5,000 and hit the blackjack tables. Amazingly, he turned it into $27,000, enough to keep the doors open until some cash-flow started rolling in.
One year later, it brought in $75 million of revenue. In 1978 it went public. And today it is a US$56 billion leader in its field.
It’s a great story.
But Fedex is an even better story for you to continue to follow today.
I’ll tell you why.
Fedex is a kind of bellwether for the state of the underlying economy. One company whose results give you a snapshot of the strength of consumer demand.
Especially in the era of internet shopping.
If it’s doing well, then the economy is generally doing well. After all, consumer spending drives 70% of all economic growth, according to most estimates.
That’s why I looked out especially for yesterday’s earnings results.
I’ll come back to the numbers shortly, and what they mean for the Australian stock market going forward.
But first, a bit about the company itself.
As you probably know, Fedex is one of the world’s largest courier companies. Its main competitor is United Parcel Services [NYSE:UPS]. The two of them dominate the US courier market, and are major players on the world stage.
You can use one or the other for bellwether purposes, but I prefer Fedex based purely on personal habit.
It’s one of those few companies that’s name has become a verb.
Just like you ‘google’ something, ‘Fedex’ is synonymous with the act of sending someone an item.
Movie scripts are popular items to be ‘fedex-ed’. A fact that indicates both the urgency of the script, and the efficiency of the renowned courier service.
And Tom Hank’s character in the 2000 film Castaway was a Fedex employee. A fact that, funnily enough, saw job applications to the company increase by 30% soon after the film’s release!
So what did yesterday’s earnings results say?
Behind Fedex’s numbers
At first glance the headline profit figures didn’t look too good.
First-quarter profit fell to $2.51 a share, compared with analysts’ average expectation of $3. Sales in the period rose 4% to $15.3 billion, compared with the average estimate of $15.35 billion.
Bu there were two very big reasons for this.
A hack. And a hurricane.
First the hack…
Fedex was one of many companies caught up in the Petya cyberhack back in June. Until now, analysts weren’t sure of the cost to Fedex. But now they know.
Logan Purk, an analyst at Edward Jones said in an interview:
‘It was worse than people expected. That’s a pretty big headline number they disclosed. But at the end of the day, that’s driving essentially the earnings miss and the guidance cut.’
The total cost was reported at US$300 million.
The recent hurricanes slowed sales growth towards the end of the quarter, as Texas and the Gulf Coast states were essentially shut down.
Now these two rare events masked the important numbers, to some extent. Especially if you’re trying to use the results to gauge the strength of the underlying economy.
But there were a few clues.
First, sales growth is a more crucial number for our purpose than the profit figure. And this number rose 4%, despite the headwinds encountered.
Secondly, the company announced plans to hire more than 50,000 workers for the peak holiday shipping season, and expects deliveries to rise to another record.
Simply put, these two results suggests the US consumer is still buying. And the US economy is trucking along nicely.
Further validation of this conclusion came from the Cass Freight Index Report.
It reported recently:
‘August shipments, at 1.158, rose 3.9% annually and were up 2.8% compared to July.
‘Parcel volumes associated with e-commerce continue to show outstanding rates of growth, with both FedEx and UPS reporting strong U.S. domestic volumes.
‘And according to the proprietary Broughton Capital index in the most recent month available (June), airfreight has also been showing improving strength, with the Asia Pacific lane jumping 9.5% and the Europe Atlantic lane growing 7.6% on a YoY basis.’
A reluctant bull market
All in all, this data suggests underlying economic conditions are going well. Both in the US and abroad.
That in turn is good news for Australian markets. The US is still the engine of the world economy.
But that’s not to say you shouldn’t be cautious.
Like all data, this is backwards looking. It’s the past, not the future. But if you are a ‘glass half full’ kind of person, you’d certainly be thinking that maybe things are better than expected out there.
Market are at record highs, economic indicators are improving and companies are making profits. Yet it must be the most reluctant bull market I’ve ever seen.
People are still scared. There is no ‘irrational exuberance’.
Maybe that means there is a lot more room for shares to move higher?
Editor, Money Morning
PS: Transport companies like Fedex are massive users of fuel. And as the e-commerce market heats up, we could start to see some big effects in the oil price. Our Head of Research, Greg Canavan, has an even more compelling case for oil price rises. Rises that could be bigger than anyone expects. If he’s right, then 2018 will be a big year for three small-cap oil companies. Click here to read the report.