C.M.O. 1.14.2010
Credit Market Overview
January 14, 2010
In 1859 Charles Dickens wrote “A Tale of Two Cities” and for those non-English-Lit majors among us, including yours truly, it was set in London and Paris before and during the French Revolution.
Today we are looking not at two cities but two shippers, FedEx Corp. (FDX) and United Parcel Service (UPS).
Back in mid-December FDX CEO, Frederick W. Smith, was the first of the two to say that the economy had reached a “turning point” and that destocking had “bottomed”. This was just after the company had shipped 14.1MM packages on December 14th, a number 17% higher than the same day in 2008. 12/14 is of specific import as it is considered the peak shipping day for the Holiday season.
Additionally, Fred said, December’s volume growth indicated that “global economic conditions are improving”, which was all quite interesting since these comments came on the same day FDX reported a 30% drop in quarterly profit.
Putting his money where his mouth is Mr. Smith also announced the reinstatement of merit salary raises and half of its 401(k) contributions which had been suspended in 2008.
UPS, which isn’t scheduled to announce earnings until February 2nd, gave folks a prologue last week; raising its Q409 profit forecast to between $0.73-$0.75 from between $0.58-$0.63 or about 15%. The thorn on that rose, however, was that the company also announced it was going to layoff an additional 1,800 employees.
During the preview UPS said that demand for goods shipped by air was about 20% higher in November 2009 than at its low point in December 2008. Kevin Sterling, an analyst with BB&T Capital Markets reasoned that “a lot of the retailers had let their inventories get really low, and suddenly realized, ‘Oh my gosh, we’re going to have a Christmas’”.
The macro economic implications of improved outlooks by both of these companies can not be understated as combined they are said to ship about 21MM packages globally on average each day and UPS estimates that at any given time the value of “parcels in transit” represents about 6% of U.S. GDP.
BB&T’s Sterling believes using these companies’ as an economic barometer is justified as because of their role in enabling commerce, “they have more visibility into 2010 than when 2009 began”.
Another possible window into the future came from the results of an October study conducted by Watson Wyatt, the HR consulting firm, which stated that of the 201 companies they polled, 54% of those that froze salaries last year plan to restore increases within six months and that 35% plan to restart company contributions to 401(k) plans within the same time period.
CDS levels for FDX have dropped fairly steadily through out 2009 and into 2010 with only a minor hiccup leading up to Thanksgiving but they then quickly returned to their downward track afterwards. For the first part of 2009 the CDS and stock were positively correlated, which translated into a negative for the equity price. Since the oft mentioned March 6th date, the stock has been on a bit of a tear peaking at $91.36 on December 15th of last year, one day after “peak shipping day”. FDX’s stock closed at $83.76 last night while the CDS closed at 60bps.
UPS hit a few potholes on its route through 2009 bottoming, like everything else in the world on 3/6/2009 and then moving sharply higher before doing what can best be described as two steps forward and one step back. With that said the stock hit a 52-week high of $62.82 on Monday of this week. The CDS is not back to the lows of 28bps on 8/6/2009 and 9/23/2009 but the 32bps close on 1/7/2010 was not that far away either.
Enjoy the week.
Jim Delaney
