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Why FedEx Is a Buy: Contrarian Analysts

Ted Reed|TheStreet Staff Reporter
Thursday, 17 Jun 2010 | 2:02 PM ET

Disappointing guidance from FedEx on Wednesday triggered a market decline and a 6% drop in the company's shares, but several analysts say Wall Street got it wrong.

In reports issued after the company's earnings call, two analysts cited price targets of $100 while a third said $113. Historically, the analysts said, FedEx trades at 18 to 21 times earnings. In trading on Wednesday, FedEx shed $4.94 and closed at $78.07.

Before the opening Wednesday, FedEx projected earnings of 85 cents to $1.05 a share in the current quarter and $4.40 to $5 for fiscal year 2011. Analysts surveyed by Thomson Reuters had been estimating $1.03 for the current quarter and $5.05 for fiscal 2011.

In his report, Avondale Partners analyst Don Broughton wrote: "We are impressed with the company's outlook (which includes non-cash pension headwinds) and would use any opportunity to purchase shares at these levels."

He noted that FedEx projects U.S. GDP growth of 3.2%, worldwide GDP growth of 3.1% and a 5% increase in U.S. industrial production. "International airfreight load factors are higher than they have been since 2000," he said. "Restocking has begun."

Additionally, the addition of Boeing 777 on flights from Asia to the U.S. and Europe enabled FedEx to provide the most rapid delivery on both routes, while FedEx Express CEO Dave Bronczek said that FedEx has seen increases rather than declines in overnight shipping from Europe -- despite the region's economic crisis.

Standard & Poor's analyst Jim Corridore reiterated a strong buy with a 12-month price target of $113.

He cited "sharply higher revenues than we were expecting offset by higher purchased transportation and maintenance costs." While the company is facing cost headwinds in the near term, "we see this being more than offset by revenue growth," wrote Corridore.

Jesup & Lamont analyst Helane Becker wrote that the company is "still seeing strong volume growth," including double digit growth in most regions and very strong performance for its premium International Priority product.

During the call, CFO Alan Graf said the company faces cost headwinds, primarily a fixed pension cost increase of $260 million due to the decline in the discount rate. "I doubt any of you had that much of an increase in projections," Graf told analysts. He said he is lobbying for change in the requirement that pension fund levels be maintained at "mark to market" levels based on the discount rate.

This is the lowest rate we'll ever see," Graf said. "That was a big factor in why our range may be a little bit lower than where First Call is."

Additionally, FedEx faces increased maintenance costs on planes returning to service as the economy expands. Bronczek said six were returned in the fourth quarter and more will be coming in the first two quarters of fiscal 2011, as the company grows capacity to meet demand.

Later, Graf asked, "What's wrong with a 20% to 25% improvement in EPS for the coming year?"

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Disclosure information was not available for Reed or his company.

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