FedEx gives mixed messages ahead of Fed

The credit markets were in limbo on Wednesday ahead of the crucial Fed announcement, but US bellwether FedEx provided a welcome diversion with its fiscal fourth-quarter results.

The parcel and logistics firm posted adjusted earnings per share of $2.13, well ahead of the $1.95 consensus estimate. Lower than expected fuel costs and a relatively strong showing from its core express division boosted the results. FedEx's ground division also beat expectations, helping to offset a weak performance from its freight business.

FedEx is closely watched as a barometer of global growth, so the earnings beat was greeted positively by the markets. But it wasn't all good news. The company no longer gives quarterly guidance, but it estimates that EPS growth will be in the region of 7%-13% for the full-year. This is significantly below consensus expectations, and the firm reiterated that its premium express air delivery business continues to suffer from a shift towards lower-cost international services. In response, FedEx is cutting capacity further between the US and Asia.

Nonetheless, FedEX remains a solid BBB name and its credit metrics indicate balance sheet strength. Debt was up but its cash position increased by a larger amount; its net cash is therefore in a more robust position. Free cash flow improved due to disciplined capital expenditure, and credit investors will be looking for this controlled approach to continue.

FedEx's spreads were 1bp wider at 62bps, but are more than 30bps tighter than levels this time last year. It trades wider than its peers UPS and Deutsche Post, and has done for some time. But the whole logistics sector is rightly regarded as a paragon of credit strength and it would take a structural shift for this to change.

In Europe, spreads were trading in a tight range ahead of the Fed announcement. Kabel Deutschland, though, continued to buck the trend as its future ownership remained in doubt. Kabel's spreads widened yesterday on news that Liberty Global had made an offer that trumped Vodafone's initial bid. The German firm's spreads have now tightened 28bps to 125bps on reports that Vodafone is preparing to increase its takeover offer.

From a credit perspective, Kabel would benefit from Vodafone's solid investment grade balance sheet, so it was no surprise to see Kabel's spreads tighten today. But further volatility can be expected until the situation is resolved.

All eyes will now turn to the Fed, and in particular Ben Bernanke's post-meeting press conference. This could well be the main determinant of spread direction over the summer, and Bernanke will be all too aware of its importance. He has a difficult balancing act to manage, and if he fails to strike a dovish tone - in other words, stressing the importance of economic data to tapering QE - then it will probably trigger a fresh bout of negative sentiment.

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