An earnings warning from FedEx (FDX) is telling more that what investors care to admit. As an economic bellweather, FedEx already revealed what we already know: China’s growth is slowing. FedEx said that economic problems in Europe and in the U.S. are slowing trade around the world. China is more than investors wish to admit.
China’s slowing growth story is a story that extends beyond an infrastructure building slowdown. Lower iron ore prices and flat electricity demand in China already affirmed the state of the economy for China in 2012. With the FedEx warning, lower volumes of shipments for FedEx reveal that consumption and manufacturing are also slowing.
FedEx cut its forecast for global growth in 2012 and 2013. The company said that the global economy was slowing, and that 2013 would likely get worse. FedEx reduced its earnings forecast after reporting first-quarter results. FedEx now expects earnings per share of $1.30 to $1.45 for the second quarter. Guidance for the year was lowered to $6.20 to $6.60 per diluted share.
Why is China so Important for the United States?
China has an effect on world trade. The country is an export economy, which drove consumer economies for many countries that includes the United States. Lower trade numbers should be expected. Renewed quantitative easing and recently announced infrastructure spending in China will support a rebound, but a bigger issue remains: China’s consumption. During its conference call, Frederick Smith, the CEO of FedEx, said that:
Consumer consumption in China is not increasing at a significant rate, contrary to everybody’s hopes. While exports from, say, the United States into China have grown, they are dwarfed by the exports from China into the United States. And as the big economies in Europe and the U.S. have grown or contracted — grown at a far lesser rate or, in the case of certain European countries, have contracted, that’s reflected in the numbers in China. And you can’t escape that. I’ve been somewhat amused watching some of the China observers, I think, completely underestimate the effects of the slower exports on the overall China economy.
Business Section: Investing Ideas
Companies discussed in this article were:
1. FedEx Corporation (FDX, Earnings, Analysts, Financials): Provides transportation, e-commerce, and business services in the United States and internationally. Market cap at $26.51B, most recent closing price at $84.39.
2. Caterpillar Inc. (CAT, Earnings, Analysts, Financials): Manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. Market cap at $59.92B, most recent closing price at $91.72.
Companies in the commodity sector that will provide investors with a leading indicator on a global economic recovery include:
3. Talisman Energy Inc. (TLM, Earnings, Analysts, Financials): Engages in the exploration, development, production, transportation, and marketing of crude oil, natural gas, and natural gas liquids. Market cap at $14.42B, most recent closing price at $13.97. A rebounding economy will lead to higher energy prices. This exploration firm will be one of the first to recover.
5. Potash Corp. of Saskatchewan, Inc. (POT, Earnings, Analysts, Financials): Produces and sells fertilizers and related industrial and feed products primarily in the United States and Canada. Market cap at $37.81B, most recent closing price at $44.0. Fertilizer demand will be strong as global economies improve.
6. Vale S.A. (VALE, Earnings, Analysts, Financials): Engages in the exploration, production, and sale of basic metals in Brazil. Market cap at $96.B, most recent closing price at $18.64. Vale has a low P/E and a high dividend of nearly 6%. Renewed demand in China will reflect in stronger earnings from Vale.
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Dig Deeper: Access Company Snapshots, Charts, Filings
- FedEx Corporation (FDX, Chart, Download SEC Filings)
- Caterpillar Inc. (CAT, Chart, Download SEC Filings)
- Talisman Energy Inc. (TLM, Chart, Download SEC Filings)
- Suncor Energy Inc. (SU, Chart, Download SEC Filings)
- Potash Corp. of Saskatchewan, Inc. (POT, Chart, Download SEC Filings)
- Vale S.A. (VALE, Chart, Download SEC Filings)
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