FedEx Cheer Doesn't Tell the Whole Story

Like the Fed, most of its optimism is based on factors in place prior to Katrina.
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Chairman Alan Greenspan and the Fed aren't the only ones surprising Wall Street with their confidence in the economic outlook.

FedEx

,

(FDX) - Get Report

, whose package volume is often used as a proxy for economic activity, also did its share of cheerleading Wednesday.

CEO Frederick Smith said that "despite uncertainty related to Katrina and other economic conditions," he remains optimistic about "continued economic expansion in the U.S."

The bullishness was reminiscent of the company's role in the Steven Spielberg movie

Cast Away

. In the film, a FedEx package floats from the wreck of an airplane and manages to reach Tom Hanks, who's been left stranded on a desert island after the plane wreck.

Still, the economic resiliency foreseen by FedEx might could be wishful thinking. Like the Fed on Tuesday, Smith predicated his optimism mostly on pre-Katrina evidence.

As

reported by Ross Snel here, for the three months ended Aug. 31 (only two days after Katrina hit the Gulf Coast), FedEx posted net first-quarter earnings of $1.25 a share, well above the $1.17 expected by Wall Street. Average daily package volume -- which combines FedEx Express and FedEx Ground results -- was up 5% from a year ago.

Although Hurricane Katrina did some damage to FedEx facilities in the Gulf Coast, most of the company's operations outside New Orleans are up and running, according to CFO Alan Graf.

As for gasoline prices, which already were surging ahead of Katrina, FedEx has the advantage over other companies -- airlines, for instance -- of being able to pass on higher costs through special fuel surcharges.

The company even lifted its earnings forecasts for its fiscal year ending May 31 by 5 cents a share, pleasantly surprising investors and sending FedEx shares up by more than 6% in recent action.

Wall Street was concerned that plunging consumer confidence and a slowing economy would hit package-shipping activity. Those concerns weren't necessarily misplaced, maybe just early. The Fed's concerns about inflation were based on a strong economy to date; the future remains in question. Similarly, FedEx's bullishness is based on the resilience of consumers to energy costs up to now.

"The long-term concern over fuel costs is not a direct link

for FedEx," says Morningstar transport analyst Nicolas Owens. "It's all the impact

of energy on the economy."

Jeffrey Saut, market strategist at Raymond James, was bullish on FedEx and the transport sector as a whole several weeks ago, as he was betting that oil and gasoline prices were about to come down. But now that Hurricane Rita threatens some of the energy production and refining operations that were spared by Katrina, and with heating season just around the corner, he's abandoned the thesis.

"Now it's all about Rita," Saut says. "If we get $3 gasoline again, and in one month people in Michigan start seeing their heating bill is twice what it was last year, how will people react?"

Perhaps reflecting that concern, stock proxies dropped on Wall Street Wednesday, as crude futures again went above $67 a barrel. The

Dow Jones Industrial Average

was recently down 57.87 points, or 0.55%, to 10,423.65. The

S&P 500

dropped 5.44 points, or 0.45%, to 1215.90. The

Nasdaq Composite

was lower by 13.04 points, or 0.61%, at 2118.29.

To their credit, FedEx executives did mention Rita in a conference call, saying that if crude prices were to move well above $70 a barrel, all bets were off in terms of its guidance.

For Raymond James' Saut, there are other factors beyond energy arguing against a "real" rebound in confidence and economic activity. First, Katrina's devastation of southeastern ports and its impact on both inflation and growth hasn't been fully measured.

Then new bankruptcy laws becoming effective next month will boost minimum payments on credit card debt, the alternative tax is taking more from the middle class, and health care and education costs are rising. "The consensus of many economists is that there will be an offsetting jump in economic growth from the reconstruction efforts. I got too many gray hairs on my head. I just don't believe it," Saut says.

For FedEx, dark days aren't necessarily ahead, even if consumers start shifting toward less expensive ways of shipping packages, according to Morningstar's Owens. "If demand shifts from express delivery, where FedEx margins are 4%, to ground transport, where they're at 12%, it's not bad at all," he says.

But if soaring energy finally hits U.S. and global demand considerably, FedEx will also feel the pinch. Its executives, and the Fed, must be hoping that Rita will miss the Texas oil refineries.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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