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FedEx Warned Economic and Trade Slowdown Would Hurt Its Business

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FedEx provides a dismal outlook

FedEx (FDX) provided a bleak outlook for fiscal 2020. The company cautioned that its business continues to face the multiple challenges of trade uncertainty, global economic weakness, and an ongoing mix shift to lower yielding services while entering fiscal 2020.

FedEx expects the GAAP EPS before the year-end MTM retirement plan accounting for adjustments for fiscal 2020 to be $13.25. The non-GAAP EPS are expected to be $15.52, flat on a YoY basis. Analysts polled by Thomson Reuters forecast EPS of $16.00 for fiscal 2020. FedEx’s peers United Parcel Service (UPS) and Forward Air (FWRD) are likely to register YoY growth of 3% and 4.3% in their respective fiscal 2019 adjusted EPS.

Why the pessimistic outlook?

During the fourth-quarter earnings conference call, FedEx stated that global delivery and logistics are being hampered by the negative manufacturing output in Europe, mainly in Germany and Italy. An economic slowdown in China and ongoing trade dispute with the US is hampering its business operations in Asia.

The delivery giant is facing the risk of being put on the “unreliable entities list” by the Chinese government after it made a second error with telecom-gear maker Huawei Technologies’ packages last week. The company was already facing a probe by Chinese authorities for the wrongful delivery of Huawei parcels in late May. Last week, FedEx returned a package to the sender in the UK that contained a Huawei phone.

Notably, the delivery giant has been caught in the middle of the ongoing trade dispute between the US and China. The ongoing Chinese government probe over mishandling Huawei parcels is seen as retaliation for the Trump administration’s ban on US companies doing business with the world’s largest telecom equipment manufacturer.

Additionally, the non-renewal of a client’s contract would also negatively impact its overall business. Notably, in early June, the company announced that it would not renew its contract with Amazon (AMZN) for Express domestic delivery of the e-commerce giant’s packages. The delivery giant generates approximately 1.3% of its revenues from doing business with Amazon.

One can gain exposure in the ground freight and logistics industry by investing in the SPDR S&P Transportation ETF (XTN), which has allocated 42.3% of its fund in the space. The ETF has returned 9.8% in the year so far but underperformed the S&P 500, which has gained 16.4%.

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