Is a Global Recession Coming?
Economists and investment banks have warned throughout 2022 that the global economy is slowing under the weight of ongoing inflation and interest rate hikes by central banks.
But now CEOs are starting to see first-hand evidence of this slowdown in their business — and as a result, they are lowering their earnings forecasts.
On Thursday, FedEx became the latest business giant to sound the alarm. The shipping company saw its shares fall more than 20% on Friday after it withdrew its full-year guidance and released weaker-than-expected preliminary earnings results, citing declining global shipping volume.
And in an interview with CNBC, CEO Raj Subramaniam was asked whether the global economy is heading for a “global recession.” His response was a clear warning to investors: “I think so; these numbers don’t predict very well.”
“We are seeing volume decline in every segment around the world,” Subramaniam added. “So we’re just assuming at this point that the economic conditions aren’t going to be good.”
The CEO said FedEx will now go into “cost management mode” to deal with declining revenues and rising costs due to inflation. And in a particularly chilling warning to Wall Street, he added that his company’s poor results “are a reflection of everyone else’s activities.”
A dark quarter
FedEx was due to release its fiscal first quarter results next week, but the company decided to push the release forward.
This type of earnings announcement is usually done when companies’ actual financial results don’t match the forecasts they’ve previously given to investors, when acquisitions have been made, or when management wants to warn Wall Street. And investors got that from FedEx on Thursday.
For the fiscal first quarter ended Aug. 31, FedEx posted earnings per share of $3.44, compared to analyst consensus estimates of $5.14, according to data from FactSet. Revenue also came in slightly below Street’s consensus estimates at $23.2 billion, compared to $23.6 billion.
The company said in a press release after the poor results, it will be necessary to consolidate its activities in order to adapt to the new, more challenging economic environment. That includes plans to close 90 office locations, cut capital expenditures by $500 million over the next year, delay hiring and reduce flight frequency.
FedEx management noted that freight volumes have declined dramatically as global economic trends “deteriorated significantly” in recent months. Sales for the shipping giant’s two largest customers, Walmart and Target, were also lower than expected in the August quarter, as retailers continue to face declining revenues amid an inventory mismatch caused by shifting consumer spending trends after the pandemic.
“We are tackling these headwinds quickly, but given the speed with which conditions are shifting, the first quarter results are below our expectations,” Subramaniam said in a statement following the release of the results. “While this performance is disappointing, we are aggressively accelerating efforts to reduce costs and are evaluating additional measures to improve productivity, reduce variable costs and implement structural cost-saving initiatives.”
As a result of this slowdown, FedEx now forecasts fiscal second quarter adjusted earnings per share of $2.75, compared with consensus estimates of $5.47, according to FactSet. And management added that next quarter it expects revenue of between $23.5 billion and $24 billion, compared with consensus estimates of $24.9 billion.
Wall Street response
Wall Street analysts were quick to lower their forecasts for FedEx stocks after announcing pre-earnings and the weak outlook.
Adam Roszkowski, a Bank of America research analyst, downgraded FedEx’s rating from a “buy” to a “neutral” rating and lowered its price target from $275 a share to just $186 in a Friday note.
The analyst said he downgraded the shipping giant primarily because of its “rapidly declining macro environment” and the company’s “high operating leverage” — or high fixed costs, meaning FedEx must earn consistent revenues to make a profit and grow more. influenced by sales declines. In addition, the company has about $20 billion in long-term debt, so it has significant interest expense.
UBS also lowered its price target for FedEx shares from $308 to $232 on Friday, with analysts claiming that COVID lockdowns, economic weakness in Asia and operational problems in Europe were the main factors driving the company’s poor results in the last quarter. .
They admitted, however, that FedEx’s problems could signal a more global economic slowdown, as evidenced by reduced international air freight volumes, but noted that UPS recently held an analyst sales breakfast on Sept. 6, where it announced its full-year guidance. , so this may be a more company specific issue.
This story was originally on Fortune.com