S&P 500: -10.31 (-1.30%)
FedEx (FDX) +4.76%
FedEx reported fiscal third quarter results that were well short of expectations and announced additional cost reduction actions in response to severity and expected duration of the recession.
Express and freight segments were hardest hit by shrinking demand, with revenue off 18 percent and 21 percent, respectively. Ground shipping was the bright spot during the quarter. Volumes increased 2 percent, which can be attributed to FedEx wining DHL clients (DHL recently exited U.S.) and to ground’s cannibalization of more expensive express shipping.
FedEx said the continued deterioration in global economic conditions was behind the poor results, as shipment volumes declined and a more competitive pricing environment emerged. The company also said revenue was negatively impacted by reduced fuel surcharges and lower shipment weights. In response to the downturn, FedEx said it will reduce network capacity at FedEx Express and FedEx Freight, further reduce personnel and work hours, and expand pay reduction actions to include non-U.S. employees.
FedEx issued downside guidance for its fiscal fourth quarter. The outlook assumes continued weak global macroeconomic conditions and stable fuel prices. FedEx is generally considered a bet on the U.S. economy and the global economy, and the company is going to benefit as soon as there’s a rebound.
General Electric (GE) -1.84%
GE management spent six hours today reviewing GE Capital’s balance sheet and reiterating the fact that the finance unit will not need outside funding and will turn a profit in 2009. Assuming unemployment averages 8.4 percent this year and the U.S. economy shrinks by 2 percent, GE expects GE Capital to make a profit between $2 billion and $2.5 billion. Under the worse-case-scenario used by the Fed to test banks, GE predicts net income from its finance unit would break even in 2009.
Investors have become somewhat single-minded in their focus on GE Capital as they fear the unit’s $637 billion balance sheet (as of 12/31/08) is full of souring assets like commercial real estate loans and securities that make the unit and its parent vulnerable to future losses. The presentation today resembled that of a bank’s earnings presentation, providing a higher level of disclosure than GE Capital has before.
Despite GE Capital’s extra transparency, there still wasn’t any new information that would change my view that the shares are undervalued.
Greif Inc (GEF) +4.17% *tearsheet attached*
Greif (which rhymes with “life”) engages in the manufacture and sale of industrial packaging products as well as containerboard and corrugated products worldwide. The company operates in three business segments: Industrial Packaging (81 percent of revenues, 76 percent of operating income), Paper Packaging (18 percent, 19 percent) and Timber (0.5 percent, 5 percent).
Grief is the global leader in industrial packaging products and services with 30 percent of market share and leading market positions in steel drums, fibre drums, closures and water bottles. Greif derives its competitive advantage from its comprehensive product portfolio and unmatched geographic diversity. This provides their customers with a “one-stop-shop” and addresses substitution considerations, which is particularly important in an industry with little product differentiation.
Greif also benefits from a diverse customer base – no single customer represents more than 3 percent of revenues and their top ten customers do not exceed 20 percent of revenues – shields Greif from a downturn in one of their end markets that include chemicals, food, petroleum, agricultural and pharmaceutical industries.
Demand for Greif’s products is sensitive to the general economic climate, so it no surprise to see production volume teeter off. Higher energy and raw material costs also pose a threat to profitability. The company recently accelerated its very successful cost-cutting program that was implemented in 2003, and expects to generate an additional $100 million in free cash flow in 2009.
Greif has a history of rewarding its investors and has returned 20 percent of operating cash flow to shareholders since 2002. The company has been growing their generous dividend at a 40 percent rate in the last five years, and all indications imply that trend will continue.
Quick Hits
- The Bear Necessities
- Trivial Pursuit
- U.S. House Passes 90 Percent Tax on Employee Bonuses
- Naked Short Sales Hint Fraud in Bringing Down Lehman
Peter Lazaroff, Junior Analyst
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