FedEx's Q3 Shows Upward Earnings Trajectory, Stifel Says In Upgrade

FedEx Corporation FDX reported a top- and bottom-line beat in the third quarter Tuesday, turning at least one Wall Street analyst bullish.

The Analyst

Stifel's David Ross upgraded FedEx's stock rating from Hold to Buy with a price target lifted from $284 to $295.

The Thesis

FedEx's Q3 report was "good" overall, even though the Express and Freight divisions fell short of expectations, Ross said in a research report.

Express accounted for 57 percent of total revenue and 46 percent of EBIT and reported a weaker-than-expected margin, the analyst said. Multiple reasons exist for weak margins, such as an increase in bonus accruals due to strong performance, Ross said. The longer-term trend shows margins are "heading in the right direction" — even if they've stalled recently — as the company works toward achieving its fiscal 2020 targets, he said.

FedEx's Freight division accounted for 10 percent of total revenue and 5 percent of EBIT and saw a strong volume growth and yield improvement, the analyst said. Revenue per shipment rose 6 percent excluding fuel surcharges, "so we continue to wonder why more margin expansion has not been seen here," Ross said.

FedEx's Ground business was better than expected and highlighted by a margin improvement on 6-percent volume growth and 6-percent yield growth, the analyst said.

FedEx's earnings report signals that its general earnings trajectory is likely to move higher going forward, leading the stock to appreciate accordingly, according to Stifel.