Sell-Side Expectations For FedEx Getting More Upbeat As Q3 Release Approaches

“Positive Fundamentals and Ground margins that are likely near a trough drive our more bullish view on FedEx Corporation FDX relative to the market,” Barclays’ Brandon R. Oglenski said in a note, while maintaining an Overweight rating on the company, with a price target of $230.

Reasons For Optimism

While FedEx receives a lot of attention when it reports its earnings, given that it is among the few global industrial firms to report away from the typical calendar cycle, the analyst believes the market appears concerned in the current quarter that the expectations might be too high.

“However, global trade expansion in 2017 is shaping up to be the strongest witnessed this cycle, signaling supply chain tightness and a potential for shippers to ‘trade up’ for premium services,” Oglenski noted.

The analyst expects investor attention to be focused on ecommerce margins, driven by the Ground segment.

Oglenski pointed out that FedEx’s capital investments over the past year have added significant cost to the network, which management highlighted was dragging margins down.

Margin Expectations

“Investor perception is a bit more negative, with many suspicious that e-commerce growth is diluting profitability for FedEx and others. We think the reality might be closer to management’s explanation,” the analyst stated.

In addition, pricing has been under pressure from the United States Postal Service, which Oglenski believes could potentially negatively impact results.

On the other hand, the recent meaningful reduction in the company’s Ground margin seems to be driven by hub capacity expansion projects, rather than a negative e-commerce mix.

“Higher hub costs should be absorbed by future growth supporting a higher Ground margin outlook,” the analyst went on to say.

Apart from this, FedEx’s focus on price is expected to support higher growth than its peers.

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