Deutsche Bank Upgrades FedEx to Buy
Over the weekend, analysts at Deutsche Bank upgraded shares of FedEx (FDX) to Buy (from a hold) and raised their price target to $318.
Just five months ago, investors were ambivalent about FDX due to their “little free cash flow support and a string of deep negative earnings revision.” However, FDX has earned investors interest again after being able to recover from -45% decline peak to trough this year (vs. -26% peak to trough for UPS). Although FDX was at a much lower trough than UPS, they were able to come back and make investors confident enough to upgrade shares despite the strong rally since the March lows.
In fact, analysts see significant benefits in the near future for FDX.
For instance, due to accelerating yield and reducing cost per shipment, FDX is bound to see “the best YOY improvement in ground margins in any quarter since at least 2012.” The analysts expect ground margins advanced at least 300bps.
In addition, with the "opportunity for strong incremental margins as e-commerce volumes surge," FDX and UPS have the chance to gain multi-year contracts for higher prices. FDX is also in position to have a “smooth peak season that allows for more consistent fixed cost absorption” because shipper behavior has been constantly changing.
Lastly, both FDX and UPS are expected to benefit off of a potential COVID-19 vaccine. Currently, FDX is investing in 90 cold chain facilities and UPS is building “freezer farms”, which leaves both companies standing in a good position. Analysts also “see potential for upside to EPS estimates from eventual deployment of FDX’s significant, and growing, cash balance (>10% of market cap in cash on balance sheet, and growing).”
On FDX, the analysts are "7% above consensus for fiscal 2Q and 16% above consensus for fiscal ‘22." FDX’s future valuations should continue moving higher with “the combination of higher earnings, lower capex, and higher free cash flow/conversion” which is "a powerful driver of higher P/E valuation."
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