Economists and investment banks have warned of a slowdown in the global economy through 2022 due to sustained inflation and central bank interest rate hikes.
But now, CEOs are starting to see evidence of this slowdown directly in their businesses, and as a result, they’re cutting their earnings forecasts significantly.
On Thursday, FedEx sounded the alarm as the latest giant. Shipping companies confirmed stocks fell more than 20% on Friday after withdrawing full-year guidance and announcing preliminary earnings results that were weaker than expected, citing lower global shipments. .
Also in an interview with CNBC, CEO Raj Subramaniam was asked if the global economy was headed for a “global recession” and responded with a harsh warning to investors.
“We are seeing volume declines across all segments worldwide,” added Subramaniam. “So, at the moment, we assume that the economic situation is not good.”
The CEO said FedEx would enter “cost control mode” to deal with lower revenues and higher costs due to inflation.And a particularly chilling warning to Wall Street. , he added that his company’s poor performance was “a reflection of all the other businesses.”
FedEx was due to report its first quarter earnings next week, but the company has decided to release it early.
Earnings advance announcements of this kind are typically made when a company’s actual financial results do not match projections previously provided to investors, when acquisitions are made, or when management wants to provide Wall Street with a warning. And on Thursday, that’s what investors got from FedEx.
FactSet data showed FedEx’s earnings per share in the first quarter ended August 31 was $3.44, compared with analyst consensus expectations of $5.14. Revenue was also slightly below Street’s consensus expectations at $23.2 billion compared to $23.6 billion.
The company said in a press release after the poor performance that it would be forced to consolidate its operations to adapt to the new and more difficult economic environment ahead. It includes plans to cut capital spending by $500 million over the next year, defer hiring and reduce flight frequency.
FedEx management noted that global economic trends had “significantly deteriorated” over the past few months, resulting in a dramatic decline in shipment volumes. Business from the shipping giant’s top two clients, Walmart and Target, also fell in the August quarter as retailers continue to grapple with lower revenues amid inventory discrepancies stemming from post-pandemic shifts in consumer trends. fell short of expectations.
“While we are quickly addressing these headwinds, given the speed at which the situation is changing, our first quarter results have been below expectations,” Subramaniam said in a post-earnings statement. “While this performance is disappointing, we are committed to aggressively accelerating our cost reduction efforts, increasing productivity, reducing variable costs and implementing additional measures to implement structural cost reduction initiatives. I appreciate it.”
As a result of this slowdown, FedEx now forecasts adjusted earnings per share for the second quarter of $2.75, compared to consensus forecast of $5.47, according to FactSet. Management also added that he expects revenue of $23.5 billion to $24.0 billion in the next quarter, compared to the consensus forecast of $24.9 billion.
Wall Street reaction
Wall Street analysts were quick to cut their forecasts for FedEx shares after the pre-earnings announcement and weak outlook.
Adam Roskowski, a research analyst at Bank of America, said in a note on Friday that he downgraded FedEx shares from a ‘buy’ rating to a ‘neutral’ rating, with a price target down from $275 a share. Reduced to just $186.
Analysts said they were downgrading the shipping giant mainly due to a “rapidly declining macro environment” and the company’s “high operating leverage” or high fixed costs. with a decline in sales. On top of that, the company has about $20 billion in long-term debt, which means it will pay a lot of interest.
UBS also lowered its FedEx share price target to $232 from $308 on Friday, with analysts saying the COVID lockdown, economic weakness in Asia and operational problems in Europe were a factor in the company’s recent quarter. claimed to be the main reason for the poor performance.
However, they acknowledged that the FedEx problem could be a sign of a more global economic slowdown, evidenced by declining international air freight volumes, while UPS recently announced on Sept. It held a sell-side breakfast for analysts, noting that it maintained full capacity. 2020 guidance, so this may be a more company-specific issue.
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