Fadi Chamoun of BMO Capital upgrades FedEx Corporation FDX to Outperform and raised price target by $10 to $220. Further, the analyst’s upside case points to a target price of $260 over the medium-term (three years), representing a potential return of 34 percent.
What The Margins, Macro View Tell Us
“Margins in the legacy Express business appear to have near-term upside. We believe that headwinds on Ground operating margins are easing and the addition of TNT could yield substantial long-term benefits, albeit there may be bumps along the way,” Chamoun wrote in a note.
On the macro front, Chamoun sees an improved industrial production outlook should drive demand for high margin B2B shipments.
The analyst also projects higher volumes in the ground segment, with focus on pricing growth and revenue quality to support gradual improvement in operating margin.
Moreover, Chamoun said TNT integration appears to be progressing well and could be a source of positive surprise relative to his forecast.
In addition, the analyst expects moderation of capital intensity in coming years supporting improvement in free cash flow and ROIC.
Valuation
On the valuation front, FedEx shares are currently trading at a 15 percent discount to the S&P 500 compared to a five-year historical average discount of 2 percent.
“Valuation is also at a significant discount relative to other high quality industrial peers based on EV/IC and ROIC,” Chamoun added.
Shares of FedEx were up 0.13 percent to $194.61 at last check.
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