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FedEx Corp. (FDX-N), the world's No. 2 package delivery company, cut its outlook for the full year, citing fuel prices and sluggish global economic growth, sending its shares down 11 percent to a two-year low.
The sour mood of consumers, marked by a reluctance to open their wallets, is the biggest drag on improvement and needs to change for FedEx to benefit from economic expansion, company executives said Thursday.
Businesses continue to keep a lean inventory based on consumer sentiment, heightening the focus on cost controls as well as rate increases to boost profits.
"We expect sluggish economic growth will continue, largely due to a lack of confidence that U.S. and European policy makers will effectively address current economic challenges," Chief Executive Fred Smith told analysts on a conference call.
"While there's been considerable speculation that the economy has or will soon enter a recession, this is not our view at present," he said.
Analysts had expected the company to lower its earnings guidance based on a tepid domestic economy and international trade that remains slow.
"It's a cheap stock, and if this is a slowdown it's probably an opportunity to buy, but if it's more an indication of recession then I would say you wouldn't want to own it," said Donald Porter at Dalton, Greiner, Hartman, Maher & Co, which holds United Parcel Service shares.
FedEx said its strong ground and freight results offset the impact of slowing economic growth, which stifled volumes, and announced more rate increases.
At FedEx Express, the largest division representing more than 60 percent of revenue, domestic revenue per package rose 13 percent on higher fuel surcharges, yield management and increased weight per package even as average daily package volume dropped 3 percent.
FedEx's International Priority revenue per package grew 16 percent for the same reasons as well as the favorable impact of exchange rates, though average daily package volume fell 4 percent driven by declines from Asia.
Given concerns about flows from Asia, and "the macro environment we're in, the stock is going to be more sensitive than UPS, which has a lot more ground and less air," said Fred Labatt, director of equity research at South Texas Money Management. The firm holds FedEx shares and sees some economic pickup in the second half of the year.
"On the other hand, the yields were better pretty much across the board in all the segments, which means they're getting pricing and the company's doing a really good job of managing their costs," Labatt added. "Also, they're still now forecasting a double dip."
HAIR NOT ON FIRE
Memphis, Tennessee-based FedEx reiterated its multiyear plan to spend $4.2 billion US, which analysts expect will largely go toward updating its fleet to more fuel efficient aircraft such as the Boeing 777 freighter.
FedEx expects to benefit, particularly during peak season, if orders increase and retailers need more expedited transportation.
"Our customers' hair is not on fire," said FedEx Chief Financial Officer Alan Graf. "They're just saying, you know, we're going to be steady as she goes, so it just feels completely different than it did back in 2008."
The sheer volume of goods moved by FedEx makes its shipment trends a bellwether for consumer demand and economic growth.
FedEx's trucks and planes handle packages equivalent to about 4 percent of U.S. gross domestic product and 1.5 percent of global GDP.
The company runs the world's largest cargo airline. It is considering buying about 50 wide-body freighters from Boeing Co and Airbus to update its fleet.
FedEx, which like UPS has been able to pass along rate increases with limited customer , dragged by high gasoline prices and supply chain disruptions after Japan's March earthquake and tsunami.
The Federal Reserve Wednesday ramped up aid to the U.S. economy, warning of "significant" downside economic risks including global financial markets strains.
FedEx's revenue rose 11 percent to $10.52 billion in the quarter that ended Aug. 31, from $9.46 billion a year earlier. That was above the $10.32 billion forecast on average by Thomson Reuters I/B/E/S.
FedEx shares were down 9.4 percent at $65.70 at midday, putting them down about 30 percent so far this year. The shares fell as much as 11 percent earlier in the day.
With share prices depressed, FedEx said it plans to buy back 5.7 million shares under its existing repurchase authorization.
The Dow Jones Transportation average has dropped about 19 percent and UPS shares have fallen about 14 percent this year.
UPS, the No. 1 package delivery company, in an investor meeting last week affirmed its call for record 2011 earnings, downplaying the likelihood of a double-dip recession. .