Investors have worried over the past few months about what difficult macroeconomic conditions and a slowing global economy could mean for corporate earnings. late thursday, FedEx (FDX -21.40%) alarmed that these concerns are valid.
FedEx expects to miss Wall Street’s estimates by more than 30% in the recently concluded quarter, and warned that the current quarter will be just as bad. The company saw market conditions deteriorating rapidly in the second half of August and is so uncertain about the months ahead that it has withdrawn its full-year guidance.
The news is certainly troubling and has sent FedEx shares down more than 20%, contributing to a broader sell-off in shares on Friday.
But for long-term investors, perhaps the best way to see the FedEx warning is as a signal that there are buying opportunities ahead.
A global slowdown is taking its toll
CEO Raj Subramaniam said in a statement FedEx was surprised at how quickly the global economy deteriorated near the end of its fiscal first quarter on Aug. 31. expects $5.14 per share and said second-quarter earnings could be as low as $2.65 per share compared to the consensus estimate of $5.48 per share.
“Global volume declined as macroeconomic trends deteriorated significantly later in the quarter, both internationally and in the US,” Subramaniam said. “We are moving quickly against these headwinds, but given the speed at which conditions have changed, the first quarter results are below our expectations.”
Wall Street has been on edge over the past few months, looking for signs of exactly what Subramaniam is describing. War in Europe and a combination of tightening credit conditions and coronavirus lockdowns in China have slowed growth overseas, and at home the Federal Reserve’s anti-inflation campaign is set to use higher interest rates to cool the US economy.
FedEx could be the canary in the coal mine, signaling a miserable earnings season as October rolls around and most others S&P500 Companies start reporting quarterly updates. What is likely to spook investors is Subramaniam’s observation that conditions deteriorated significantly in late August. If other multinationals experienced the same thing in August and September, earnings expectations are likely overblown for a wide range of companies.
Could some of this be specific to FedEx?
Economic conditions are almost certainly taking their toll, but investors should be aware that FedEx may feel the impact more than most. FedEx is under new management – Subramaniam only took over as CEO in June after the departure of company founder Fred Smith – and the company is in the early stages of a major reorganization and cost-cutting plan.
FedEx has struggled in recent years with operational missteps at its ground delivery business, labor issues with contractors and a difficult integration of European delivery company TNT Express. It is also adjusting its domestic business after a high-profile separation Amazon.comwho was once a major customer.
Given what’s going on at FedEx, it’s possible this is more of a ill-timed slowdown with an outsized impact.
It is worth noting that on September 6, arch-rival FedEx United Parcel Service (Oops -4.48%) reaffirmed its financial targets for 2022.
Here’s how you can prepare
While FedEx has been hit harder than most, we’ll likely hear a lot more about some of the issues the company has outlined. Analysts have been on the lookout for a wave of corporate profit warnings, and if FedEx is any indication, that wave is approaching.
Fortunately, investors have had plenty of time to prepare for this reality. The S&P 500 is down nearly 20% year-to-date, meaning at least some of the potential downside is likely already priced in.
With earnings season set to kick off in less than a month, now is the time for investors to create or update their watch lists. Nobody does their best analysis during times of panic — say, when a stock is down 20% after gains. And the best companies are strong enough to meet short-term challenges.
Despite the current challenging environment, FedEx is a market-beating investment over the long term, well positioned to benefit from secular trends such as inshoring and the continued growth of e-commerce. Should FedEx be a harbinger of things to come, there are likely opportunities to buy into other long-term hitters at prices well below today’s.
And it’s worth noting that FedEx remains confident of hitting its fiscal 2025 targets for profitability and cost reductions. It won’t happen overnight. But for those with the patience to wait out the current economic cycle, uncertain times are the best times to buy.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lou Whiteman has positions at Amazon. The Motley Fool has positions in and recommends Amazon and FedEx. The Motley Fool has a disclosure policy.