Is FedEx a Bad Omen for Earnings Season?
A disappointing outlook from economic bellwether Federal Express sent a ripple through the market as investors worried it may be a warning sign that a double-dip recession is coming.
The timing couldn’t have been worse: The government had just reported that housing starts fellway short of expectations, there were rumbles that a rescue plan for Spainwas being drawn up and billionaire investor George Soros came right out and said Europe is headed for a double dip.
Austerity measures are pushing Europe into a “downward spiral,” Soros said at a seminar discussing the euro-zone crisis. “I think a recession next year is almost inevitablegiven the current policies."
With earnings preannouncements due to start any day now, Federal Express, which reports ahead of the pack as it's on on a fiscal-year calendar, offered cause for concern: The package-delivery giant hit its earnings target and beat on revenue but its outlook fell short of expectations: The company projected full-year earnings for 2011 would be between $4.40 a share and $5 a share, below the $5.06 a share expected.
Some market pros worried that earnings warnings from other companies may follow.
“There’s no question this will be a disappointing earnings season,” said Todd Schoenberger, managing director at LandColt Trading, citing a slew of weak economic readings and the debt crisis in Europe.
But Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh, said don’t read too much into individual warnings.
“'Double dip' is a buzz word … I’m not very concerned about that,” Baum said. “I think we’re in a rebound mode … Some companies will disappoint — it’s not a reflection on the economy or the market,” he explained.
With some of these early warnings, there are other factors at play besides the economy and crisis in Europe: With FedEx, for example, higher pension and aircraft-maintenance costs were at play. And a profit warning from Nokia was largely due to competition heating up in the smartphone market.
David Resler of Nomura Securities said he isn’t too worried either.
“We don’t think that we’re at risk for a double dip,” Resler said.
The real problem, some market pros say, is dialing down expectations.
“Companies have consistently beaten analysts’ expectations over the last three quarters. Now, I think the bar has risen,” said Jack Ablin, chief investment officer at Harris Private bank in Chicago.
“I don’t think you’ll see too many preannouncements and warnings,” Ablin said, “but management will likely try to damp down expectations for coming quarters.”
Resler agrees: Nomura has been raising its economic-growth forecast since the beginning of the year but he says they're done raising, and will, in fact, probably lower their forecast for this year by about three- or four-tenths of a percent.
So what does that mean for the market?
Baum said it’s a “pick-and-choose” kind of market right now and investors are charged with the task of sorting through the wreckage — and the rhetoric.
“I heard a guy talking about Ford selling a bunch of trucks and how that means that the small business guy is going to do well,” Baum said. “I don’t believe that. The guy got a good deal and just wanted to buy a few trucks. C’mon!”
Baum likes oil companies, based on valuation, and Verizon as a play on AT&T’s troubles over Apple's iPad . He also likes Bristol-Myers Squibb and Johnson & Johnson.
Ablin said given the European debt crisis, small caps may fare better than large caps as they tend to have less exposure to overseas markets. Techs, which have some of the heaviest exposure to Europe, may take a hit, but he thinks financials, consumer discretionary and even industrials should do OK.
Even bond guru Bill Gross of Pimco is putting money into equities.
"We are making a move into equities, period,” Gross said. “Corporate equities, in terms of valuation, are selling at very low P/E ratios," he said, adding that European equities in particular look attractive — especially those with international exposure.
The market will always absorb events like a European debt crisis or BP oil spill causes, Baum explained, adding that these valuations are indeed cause for optimism.
“Look back at history,” Baum said. “The last 10 years were really bad. I’ll take the other side of that and say the next 10 years are pretty good.”