KeyBanc Sees 18% Upside In FedEx Shares

Analysts Todd Fowler and Conor Sweeney believe FedEx is well positioned to benefit from a favorable macroeconomic environment, secular supply-chain shifts, including evolving distribution patterns and improving airfreight demand. The analysts also see margin and share opportunity from fleet modernization and yield initiatives, including TNT Express integration.

KeyBanc believes a smaller aircraft fleet and increased utilization of third-party capacity would provide greater flexibility and a reduced cost structure, relative to prior cycles. In the intermediate term, the firm expects a more expansive network to benefit international growth opportunities.

The firm estimates Express margins of 8.5 percent and 9.9 percent in 2018 and 2019, respectively.

Further, the firm believes yields would improve due to improvements in domestic and international air cargo demand in recent years and reduced belly capacity from increased passenger demand and replacement of older planes, restricting incremental capacity.

"Additionally, we believe supply-chain shifts including evolving distribution patterns favor smaller, more expedited, time-definite freight movements, supporting incremental air, small package and less-than-truckload demand," the firm said.

The firm expects net capex to revert to more normalized levels following fleet modernization efforts and recent Ground network investment. This, according to the firm, will support free cash going forward.

The firm currently estimates free cash of about $45 million in 2018 and $435 million in 2019, which it feels will support dividends or share buybacks. The firm also sees scope for opportunistic acquisitions intermediately.