FedEx Sinks Most Since 2008 as Outlook Sows Doubts on Economy

(Bloomberg) -- FedEx Corp. plunged the most in a decade as a darkening view of demand for shipping services outside the U.S. prompted the company to slash its profit forecast and pare international air-freight capacity.

The courier cut its outlook just three months after raising it, reflecting an abrupt change in FedEx's view of the global economy. Adjusted earnings in fiscal 2019 will be no more than $16.60 a share, FedEx said in a statement late Tuesday. That was less than the lowest analyst estimate compiled by Bloomberg.

“The peak for global economic growth now appears to be behind us,” Raj Subramaniam, a FedEx veteran who was named this month to take over the Express cargo airline, said on a conference call with investors and analysts.

FedEx's gloomier view sharpened concerns that the world's economy is weakening amid rising trade tensions, especially between the U.S. and China -- which the company cited as another source of trouble. As demand lags expectations, FedEx said it would offer an employee buyout program, lower discretionary spending and reduce overseas network capacity at Express.

“When you have a change that comes on you as fast as this did, it's hard to react to it,” Chief Executive Officer Fred Smith said on the conference call. “Our international business, especially in Europe, weakened significantly since we last talked with you.”

The shares plunged 12 percent to $162.51 at the close in New York, the biggest drop since December 2008. That pushed this year's tumble to 35 percent, compared with a 21 percent slide for United Parcel Service Inc. and a 15 percent decline in a Standard & Poor's index of industrial companies.

Read more: ‘Jarring' View Cut a Sign of Worsening Global Woes

“We are very surprised by the magnitude of the headwind, which is what might be seen in a severe recession,” Morgan Stanley analyst Ravi Shanker said in a note to investors.

At FedEx, international revenue fell short of company expectations in the fiscal second quarter, which ended Nov. 30. In Asia, FedEx cited “continued tariff and trade concerns” as a drag. In Europe, it pointed to deterioration in Germany and Italy, as well as uncertainty in the U.K. over the country's negotiations to leave the European Union.

“Most of the issues that we're dealing with today are induced by bad political choices,” Smith said, also citing issues such as economic policies and “the tariffs that the United States put in unilaterally.”

For a look at how a fragile truce keeps global trade on edge, click here

The weaker European economy will delay the benefits of FedEx's 2016 acquisition of TNT Express, a Dutch courier. As a result, FedEx said it wouldn't meet its goal of raising operating profit at the Express unit by $1.2 billion and $1.5 billion in fiscal year 2020.

The Memphis, Tennessee-based company didn't give a new profit goal for the division, where Subramaniam will replace David Cunningham on Jan. 1. Getting Europe back on track is “my first priority,” Subramaniam said.

The business mix also hurt results, with higher-priced overnight services lagging the growth of slower and cheaper offerings. That was true even in the U.S., where the company said it was still seeing a “solid” economy.

‘Big Question'

“The big question is, if the rest of the world is catching a cold, does the U.S. catch it as well?” said Trip Miller, managing partner of Gullane Capital Partners, which owns FedEx shares.

Smith said service was at “record levels'' during the busy holiday season as investments in efficiency and automation pay off. On Monday, he said, 67 percent of packages at the company's ground unit were delivered a day ahead of schedule.

FedEx is still positioned to benefit as the rise of online shopping spurs package shipments, CFRA analyst Jim Corridore said in a note to clients. That makes the shares a bargain at current prices.

“We remain optimistic on U.S. trade and FedEx's ability to offset weaker mix with lower costs,'' Corridore said. “Plus we think the low valuation more than discounts this outlook.''

The U.S. economy is set to grow 2.6 percent next year, according to estimates compiled by Bloomberg. That's a healthy clip but less than this year's expected 2.9 percent expansion. With growth decelerating, FedEx scaled back its profit expectations.

Adjusted earnings in fiscal 2019 will be $15.50 to $16.60 a share, down from the previous goal of $17.20 to $17.80, the company said.

To contact the reporter on this story: Thomas Black in Dallas at tblack@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Richard Clough

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