With the Dow at all-time highs, it’s easy to think that the world economy is doing rather well. The market has largely shrugged off the concerns surrounding the tiny-island nation of Cyprus, and seems to be continuing its drift higher. However, all is not well at all. Results released by major economic bellwethers FedEx Corporation (NYSE:FDX) and Caterpillar Inc. (NYSE:CAT) in recent days should be deeply worrying for investors, and set off a number of alarm bells about the state of the global economy. These are both large, powerful multinational companies with strong international exposure. If they aren’t doing well, there’s a good chance that other companies will come up with similar results.
FedEx earnings report
FedEx just reported a fairly large earnings miss, and was subsequently punished for about 7% by investors. Diluted EPS came in at $1.23 versus an analyst consensus of $1.38 for a miss of about 11%. The company did beat on the top line, however, with revenues of $11 billion versus expectations of about $10.85 billion. According to management, FedEx Corporation (NYSE:FDX) had a rough quarter with “continued weakness in international air-freight markets, pressure on yields due to industry overcapacity and customers selecting less expensive and slower-transit services.” This doesn’t sound too good.
Some more frightening numbers for you: operating income was down 28% and the operating margin fell 240 basis points. Net income was down 31% to $361 million, largely to due to weakness in the Express division amid shifting consumer preferences towards lower-yielding international services, which has accelerated faster than the company’s prior expectations. The Ground division was a bit of a bright spot in the report, with a 17% operating margin and a 10% average-volume increase. The division saw a strong 11% increase in revenue.
The company is now undertaking a number of measures to turn around the Express segment, including a reduction of capacity in Asia. These measures appear crucial for FedEx Corporation (NYSE:FDX), as the Express division continues to generate most of the firm’s revenue. The company has moreover lowered its guidance for the full year with expected EPS of $6.00 to $6.20 versus earlier guidance of $6.20 to $6.60.
FedEx´s number one competitor, United Parcel Service, Inc. (NYSE:UPS), has also been delivering disappointing results, which points to a more general weakness in the delivery service market. With three misses in 2012, investors are becoming increasingly worried about the company. Despite record full year results, the company missed its estimate by 5 cents, with management citing weak global trade as a drag on profits. The international package segment was especially weak with an operating loss of $442 million on a US GAAP basis. The company does remain optimistic on its 2013 results however, expecting an increase of 6 to 12% over the 2012 adjusted EPS results.
Caterpillar sales
The other major company to report poor results in recent days was Caterpillar Inc. (NYSE:CAT). The firm reported a 13% fall in global equipment sales for the quarter ending in February, driven by a huge slowdown in Asian sales. Asia Pacific sales dropped a whopping 26%, which was a particularly salient point in the report. It is one thing to speculate on a Chinese growth slowdown affecting Caterpillar’s results, it is quite another to see it actually reflected in sales for the period.
In a previous report at the end of January, the company reported a slowdown of about 4%, which was apparently a sign of things to come. Whereas investors could perhaps have shrugged that report off as a singular poor quarter, it seems now that the problems are rooted more deeply. It looks now as though it’s going to be very, very difficult for Caterpillar Inc. (NYSE:CAT) to meet its revenue targets for 2013. Management has warned about the reluctance of mining and construction companies to invest in new equipment, which is clearly hurting the conglomerate.
It is especially worrying for Caterpillar, and thus the market at large, that the bulk of the slowdown is coming from its two main geographical regions, North America and Asia Pacific. Latin America was a lone bright spot in the report, with a 3% increase in sales. However, this is of course not nearly enough to offset the huge drops in North America and Asia.
Elsewhere in the industry, major US competitor Deere & Company (NYSE:DE) was recently downgraded to Underperform by Wells Fargo, due to an expected decline in corn prices and a bearish view of 2014 and 2015 equipment demand. Deere has been doing a little better than Caterpillar Inc. (NYSE:CAT) in terms of earnings lately, perhaps because it is not exposed to construction weakness in China.
Bottom Line
To quote a StockTwits tweet by “Prop_Trader,” when Caterpillar is weak one should be very cautious on the overall market. The same is true for FedEx Corporation (NYSE:FDX). To me, the results from these major global economic bellwethers are very troubling, and are in stark contrast to the recent strength in the overall market. This lends credence to the idea that the rally is largely driven by central bank easing, rather than actual earnings strength. It may be time to start playing defense after all.
The article Deeply Worrying Results from Two Market Bellwethers originally appeared on Fool.com and is written by Daniel James.
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