FedEx doesn't deliver
A tepid outlook from the package delivery company is not a good sign, showing that high oil prices are starting to really squeeze corporate profits.
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| The broader market and transportation stocks initially held up well as oil prices start to surge. But in the past month, the strain of high energy prices has taken its toll. |
NEW YORK (CNNMoney.com) -- FedEx issued a nasty surprise to Wall Street this morning.
The package shipping giant, largely viewed as a barometer for the overall economy, said that its results for fiscal 2009, which ends next May, would be much lower than analysts were forecasting.
Alan B. Graf, Jr., FedEx's executive vice president and chief financial officer said in a statement that the next year is expected to be "very difficult due to the weak U.S. economy and extremely high fuel prices."
Investors predictably did not like the news. Shares of FedEx (FDX, Fortune 500) tumbled about 3% Wednesday morning and shares of top rival UPS (UPS, Fortune 500) fell more than 2%.
The dismal guidance from FedEx, coupled with a sales miss from investment bank Morgan Stanley (MS, Fortune 500), helped drag the broader market down Wednesday morning. But it's the weak outlook from FedEx that could potentially be the most troubling.
Rising commodity prices have obviously been a big cause of concern on Main Street as consumers grapple with gas prices above $4 a gallon at the pump and soaring food prices at the supermarket.
Yet, the stock market had actually been holding up reasonably well in the past few months even as the price of crude oil skyrocketed from about $100 a barrel to around $135 a barrel.
The broadest market indicators -- the Dow, S&P 500 and Nasdaq -- are all still above the year-to-date lows set in mid-March at the height of credit-crunch fears.
What's more, the highly cyclical Dow Jones Transportation Average, of which FedEx is a component, has actually been one of the better performers on Wall Street this year.
Investors appeared to be betting that an eventual turnaround in the economy later this year would bode well for transportation companies, despite record high oil prices.
That's particularly the case for railroad stocks like Burlington Northern Santa Fe (BNI, Fortune 500), CSX (CSX, Fortune 500) and Union Pacific (UNP, Fortune 500). These stocks actually have been viewed as sort of stealth-commodities plays since they are benefiting from demand to transport coal and corn among other things.
But FedEx's tepid guidance is proof that high oil prices are going to dent profit growth at all transport companies.
Airlines are already feeling the pinch and have been busy cutting capacity, raising fares and laying off workers. Truckers have been reeling due to soaring diesel prices. FedEx is just the latest victim of the oil shock.
It seems logical that railroads would be next, especially since the terrible floods in the Midwest are expected to slow rail traffic for a bit. In fact, Union Pacific warned yesterday that its second-quarter profits would take about a 5 cent per-share hit due to weather-related disruptions.
With that in mind, it's worth pointing out that the Dow Jones Transportation Average, while still up 12% year-to-date, has fallen 8% since hitting a 52-week high just last month.
What's this all mean? Well, if transport stocks continue to fall, that could be a bad sign.
As energy costs rise, it may be tougher and tougher for companies to pass along a big chunk of those increases to already cash-strapped consumers.
"With the economy so slow, companies don't have a ton of pricing power," said Vincent Boberski, a portfolio strategist with FTN Financial in Memphis.
And in a note to clients this morning, technical research firm Asbury Research pointed out that further drops in the DJTA "would imply that investors are betting on an economic slowdown going into the second half of the year."
Whether or not the economy actually does worsen in the second half remains to be seen. But in light of FedEx's weak guidance, investors really should pay close attention to how much of a negative impact rising oil prices will have on profits.
If more companies start warning that energy prices are significantly eating into earnings growth, that may make it tougher for a key component of the economy, the job market, to improve.
And most think that the economy will stay in a funk as long as the unemployment level continues to climb.
"Oil is making headlines but the real thing to keep an eye on is the labor market and conditions are awfully weak," Boberski said.
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