The Best Way To Play A Rally Is...FedEx?

Stifel’s David G. Ross maintained a Buy rating for FedEx Corporation FDX, while reducing the price target from $172 to $171. He mentioned that the stock was trading at a reasonable valuation and the company seemed poised to record solid earnings growth over the next couple of quarter, provided it is able to implement its operating profit improvement plan at Express.

Although declining fuel prices have been a near-term tailwind, the impact has been partially offset by a weaker-than-expected US manufacturing environment in recent months, Ross stated. The market seems to be pricing in a worse-than-expected macro-environment.

FedEx is to poised to post robust earnings growth going ahead, given the company’s significant exposure to freight volumes and global trade. FedEx’s ability to integrate TNT and generate associated synergies, along with its ability to maintain consistency in Ground margins are, however, critical for the stock’s movement over the next six months, Ross believes.

The analyst expects FedEx to outperform United Parcel Service, Inc. UPS in 2016 in relative terms. The gap between the valuation of the stocks could narrow in the near future.

The EPS estimates for FY16 and FY17 have been reduced from $10.42 to $10.27 and from $11.60 to $11.37, respectively, to reflect lower ground and freight margins due to the continued softness in the US industrial sector.