Friday, June 24, 2011

Take aways from Fedex's earnings

FedEx Corp.(FDX), the world's second-largest package delivery company painted a rather rosy economic picture on Wednesday as it reported a 33 percent increase in earnings for the quarter ended May 31 (its 4th quarter for the fiscal year 2011) in addition to a guidance of per-share earnings growth of 39 to 50 percent for the fiscal year 2012. The company expects the global economy to accelerate in the second half of the year as fuel prices retreat from three-year highs and the Japanese economy recovers. While much of the growth will be driven by China and other developing nations, FDX said the U.S. economy will improve as well.

The company serves as the barometer of the global economy as it transports a variety of goods. FDX expects the U.S. economy to grow 2.5 percent this year and 3 percent in 2012. The company expects U.S. industrial production to grow around 4.2 percent this year and another 4.3 percent next year.

However, as one digs deeper into the statement, FDX's good news may be more of its own growth story rather than a global economic growth story. FDX, after successfully squeezed its European competitor, DHL out of the US market, understandably should enjoy a signficant pricing power sharing a duopolistic market with UPS. FDX, in its last quarter, was able to raise revenue per package by 10%, including raising fuel surcharge. In other words, it was able to pass on higher costs to its customers.

If an increase in transportation cost is widespread , can this be good news to other companies and the economy?

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