FedEx Q3: Margin Pressure, TNT Acquisition And The 'Path Of Synergies'

UBS expects an in-line to modest downside EPS from FedEx FDX when it reports its third quarter earnings on March 21.

Analyst Thomas Wadewitz, who has a Buy rating on shares, expects EPS of $2.55 versus consensus estimate of $2.62. The analyst also said Ground margin likely remains under pressure and sees around 220 bp of decline in the third quarter.

The real focus is likely to be on TNT integration and path of synergies. Citing comments from management, Wadewitz believes the IT integration with TNT is going very well and it appears likely FedEx may provide an update on its earnings conference call.

“We believe that FDX may point to a quick realization of some cost synergies and a more linear path compared to the back end loaded Express Improvement program. We anticipate very positive comments on the TNT integration which could provide a catalyst for the stock,” Wadewitz wrote in a note.

Pricing Gains

Further, the analyst expects pricing gains should be supportive of solid EPS growth. That said, mix challenges associated with rising leverage to ecommerce shipments remain a headwind for Ground business.

However, Wadewitz believes there is room for FDX's valuation to rise somewhat if there is visibility to 10 percent EPS growth in the next several years.

“We believe upside potential for FDX stock is attractive given visibility to continuing 10%+ EPS growth over the next several years. Strong volume growth in Ground and modest Express margin improvement support EPS growth and there is potential for meaningful EPS accretion from TNT in F2018 - F2020,” Wadewitz added.

The analyst has a price target of $215.

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