Economists and investment banks have warned throughout 2022 that the global economy is slowing under the weight of persistent inflation and central bank interest rate hikes.
But now, CEOs are starting to see evidence of that slowdown firsthand in their businesses, and as a result, they’re cutting their earnings forecasts.
On Thursday, FedEx became the latest corporate giant to sound the alarm. The shipping company saw its shares sink more than 20% on Friday after it withdrew its full-year guidance and reported weaker-than-expected preliminary earnings results, citing lower volume of global shipments.
And in an interview with CNBC, CEO Raj Subramaniam was asked if the global economy is headed for a “global recession,” and his response was a strong warning to investors: “I think so. , those numbers don’t bode well.”
“We are seeing a decline in volume across all segments globally,” Subramaniam added. “So we’re just assuming at this point that economic conditions aren’t going to be good.”
The CEO said FedEx will now go into “cost management mode” to deal with declining revenue and rising expenses due to inflation. And in a particularly chilling warning to Wall Street, he added that his company’s poor results are “a reflection of everyone else’s business.”
A dark room
FedEx was supposed to report its fiscal first-quarter earnings next week, but the company decided to issue its release early.
This type of pre-earnings announcement is typically made when companies’ actual financial results don’t match the forecasts they’ve previously given investors, when acquisitions have been made, or when management wants to warn Wall Street. And on Thursday, that’s what FedEx investors got.
For the fiscal first quarter ended Aug. 31, FedEx posted earnings per share of $3.44 compared with analysts’ consensus estimate of $5.14, according to FactSet data. Revenue also came in slightly below Street consensus estimates at $23.2 billion compared to $23.6 billion.
The company said in a press release after the poor results that it will be forced to consolidate its operations to adapt to the new and more challenging economic environment moving forward. That includes plans to close 90 offices, cut capital spending by $500 million over the next year, postpone hiring and reduce its flight frequency.
FedEx management noted that freight volumes have declined dramatically as global economic trends have “significantly worsened” in recent months. Business at the shipping giant’s two biggest customers, Walmart and Target, also came in lower than expected in the August quarter as the retailers continue to grapple with falling earnings amid a mismatch of inventories caused by changing consumer spending trends after the pandemic.
“We are quickly addressing these headwinds, but given the speed with which conditions changed, first-quarter results are below our expectations,” Subramaniam said in a statement after the results were released. “While this performance is disappointing, we are aggressively accelerating cost reduction efforts and evaluating additional measures to improve productivity, reduce variable costs and implement structural cost reduction initiatives.”
As a result of that slowdown, FedEx now expects fiscal second-quarter adjusted earnings per share of $2.75, compared with consensus estimates of $5.47, according to FactSet. And Management added that it expects revenue of $23.5 billion to $24 billion next quarter, compared with consensus estimates of $24.9 billion.
Wall Street’s reaction
Wall Street analysts quickly cut their forecasts for FedEx stock after the pre-earnings announcement and weak outlook.
Adam Roszkowski, research analyst at Bank of America, downgraded FedEx shares from a “buy” rating to a “neutral” rating and cut his price target from $275 per share to just $186 in a Friday note.
The analyst said he was downgrading the shipping giant mainly because of the “rapid decline in the macro environment” and the company’s “high operating leverage,” or high fixed costs, which which means FedEx needs to generate consistent revenue to make a profit and is hit harder. due to sales declines. In addition, the company has about $20 billion in long-term debt, so it has significant interest expense.
UBS also cut its price target on FedEx shares from $308 to $232 on Friday, with analysts arguing that COVID-19 lockdowns, economic weakness in Asia and operational problems in Europe were key factors driving the company’s poor results in the last quarter.
However, they conceded that FedEx’s woes could be a sign of a broader economic slowdown evidenced by shrinking international air freight volumes, but noted that UPS recently held a sales breakfast for analysts on September 6, where it maintained its totality. -annual guidance, so this could be a more company-specific issue.
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