FedEx shares are cheap, BMO says; upgrades stock to outperform

A FedEx employee loads up deliveries in San Francisco.
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FedEx stock is trading at a significant discount to the S&P 500 and some of its competitors in the industrial space, presenting an investment opportunity that could pay off in the months ahead, according to analysts at BMO Capital Markets. The firm upgraded the package delivery giant to outperform from market perform.

The firm upgraded the package delivery giant to outperform from market perform.

"FedEx shares are currently trading at a 15 percent discount to the S&P 500 compared to a 5-year historical average discount of 2 percent. Valuation is also at a significant discount relative to other high-quality industrial peers," equity analyst Fadi Chamoun wrote in a research note Monday.

Chamoun says FedEx shares have trailed the market rally since the U.S. presidential election on concerns around protectionist policies under President Donald Trump, which could impact international trade.

Since the U.S. election, FedEx stock is up 6 percent compared with an 11 percent return for the S&P 500 index and a 14 percent gain on average for the transportation group, according to BMO.

FedEx, 1 year

Source: FactSet

In the past fiscal year, FedEx derived about 24 percent of its revenue from international operations.

"On trade, we believe that while there is a risk associated with FedEx's exposure to international trade, the company's network is able to flex and adapt to changing origination-destination pairs," Chamoun wrote.

Within the United States, BMO says FedEx is likely to improve margins as operational investments subside and begin to generate long-term benefits.

"We expect increases in volume with focus on pricing growth and revenue quality to support gradual improvement in operating margin. Improving mix from recovering B2B [business to business] shipments is also supportive.

A favorable outlook for industrial production under the new administration should also be supportive of FedEx's business, according to BMO.

"Following steady y/ y [year over year] decline in industrial production since September 2015, the outlook appears to be improving. This should help support demand for high-margin B2B shipments," Chamoun wrote.

The investment firm says a combination of lower corporate taxes and a positive trajectory of free cash flow could draw investors to the stock in the months ahead.

Synergy benefits from FedEx's $5 billion acquisition of TNT Express last year could also present a positive surprise for investors.

"While we are in year one of a four-year TNT integration plan and the company could still face bumps along the way, we sense that the integration is progressing well and could be a source of positive surprise relative to our forecast," Chamoun said.

In the next 12 months, BMO says shares of FedEx could trade as high as $220, implying a gain of 13 percent from Friday's close.

— CNBC's Michael Bloom contributed to this story.