Despite uncharacteristically vocal management protests,

FedEx

(FDX) - Get Report

shares plunged Tuesday, so much so that several analysts now say the issue is looking undervalued.

Investors bailed from FedEx after the package deliverycompany said it would miss analyst consensus estimates for its fiscal first quarter, ended Aug. 31. That drowned out strong fourth-quarter numbers, which beat analyst estimates by a penny, as well as a pledge to meet full-year 2003 guidance.

Company executives protested investors' unforgiving reaction to its first quarter outlook on a conference call and on

CNBC

Tuesday morning, saying the company did not "warn," as it hadn't offered any prior first-quarter guidance. They also said fewer than half of the analysts who cover the company provide estimates for Thomson Financial, skewing the consensus, and that the company left its full-year numbers intact.

But investors paid little heed. FedEx shares closed the session down 14.3% to $48, while rival

United Parcel Service

(UPS) - Get Report

sank 2.6% to $60.21.

Analysts said investors were hoping for a more upbeat forecast and better news about FedEx's core Express business, which delivers packages primarily to the sluggish manufacturing and wholesale sectors of the economy.

But they also said that signs of a turnaround in the Express business are encouraging, that its longer-term growth looks strong, and that the stock's Tuesday drop leaves it at just 17 times fiscal 2003 earnings of $2.76, whereas a 20 to 25 multiple is more reasonable.

Beginning the Turnaround

"If you look at the incremental improvement in the Express business, it's pretty solid," said Robert Norfelt at Davenport & Co. The Express arm "did report positive revenue growth for the quarter, after five quarters in a row of negative growth, so it's working its way back into positive territory. The company has said it would be a slow recovery, and it continues to be a slow recovery, but management said it's beginning to see a turnaround," he said.

Declines in FedEx's Express package volume have also been narrowing for three quarters, while the international priority arm of its Express business and its ground and freight businesses all exceeded expectations on revenue and operating margins, said Stephen Jacobs of U.S. Bancorp Piper Jaffray.

Meanwhile, the shipping giant is targeting earnings growth of 16% for 2003 with its forecast of $2.76 for the year, while reduced capital spending has helped it turn cash-flow positive and boosted profit margins, long a point of contention with institutional investors. The company also announced at the start of this month that it will begin paying the first dividend in its 31-year history, a move that reflects management's confidence in those expanding profit margins, analysts said.

FedEx reported earnings of 78 cents per share for the quarter ended May 31, compared with 38 cents a share -- including charges -- in the fourth quarter of last year and 64 cents a share without charges. That fourth-quarter number outstripped analyst consensus expectations of 77 cents by a penny. The company also reaffirmed its outlook for full-year 2003, saying it felt comfortable with full-year estimates of $2.76. FedEx said its first-quarter earnings would be in the range of 40 cents to 50 cents a share, compared with a consensus estimate of 57 cents a share.

The company finished its fiscal fourth quarter with $616 million of free cash flow last year, which it used to reduce debt by $315 million, boost cash levels by $210 million to $331 million, and pay the dividend.

"A switch to free cash flow should be a big deal for institutional investors," said Stephen Jacobs of U.S. Bancorp Piper Jaffray. "By going to free cash flow they're improving returns and margins, and one of the biggest criticisms of the company vs. UPS is that their returns on investment capital and on average equity are significantly below those of UPS," said Jacobs. FedEx's operating margins for 2002 were 6.4%, compared to 13.4% for UPS, but that gap is closing, he said.

Four analysts suggested an appropriate valuation for FedEx would be 20 to 25 times its fiscal 2003 earnings estimate of $2.76, or $55.20 to $69. By comparison, at $60.20, UPS is valued at 26 times its next four quarters of earnings estimates.

Lack of Guidance

Analysts said that with visibility low as the economy comes out of recession, it would have helped if FedEx had provided analysts with more guidance earlier on. Just eight of the 18 analysts that cover the company calculated estimates for the first quarter, partly because of that lack of guidance, they said.

"When you don't have quarterly guidance and you're coming out of recession, it's hard to gauge performance," Norfelt said. "It's your responsibility as management to tell analysts they're somewhat aggressive in their expectations," he said. According to Regulation FD, the company would have needed to make such an announcement public. If they did not want to provide specific guidance, they could have announced simply that "they felt comfortable with the annual number, but that the earnings would be more heavily weighted towards the second half," Norfelt said.