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FedEx reported better-than-expected earnings and sales earlier this month, but its stock has yet to reap the rewards of a strong financial performance. That may be about to change, according to analysts at Bank of America.
Bank of America added
(ticker: FDX) to its US1 list—a collection of the bank’s best U.S. listed investment ideas—citing e-commerce growth and margin improvements. Bank of America analyst Ken Hoexter set a price target of $372, representing a 26.5% upside from a recent $297.67. The bank removed
(ticker: UNP), to make room for FedEx.
FedEx stock dropped 3.6% after reporting earnings after the close on June 24, despite consensus beating numbers. The disappointment, writes Hoexter, was likely due to management’s decision to raise capital spending forecasts for 2022 to $7.2 billion compared with $5.7 billion in capex for 2021. Those concerns are overblown, the analyst says, because the capex should support high returns on its investment in capacity, automation, and fleet renewal—all of which should help expand margins in future quarters.
Over the course of the 2021 fiscal year, the company saw margins on express shipping double to 7.4%, and Hoexter sees operating margins rising to 8.4% in fiscal 2022 year, and to 9.1% in 2023.
Some investors are also worried about a slowdown in sales growth, and they should be—it will almost certainly slow. E-commerce sales rose 39% over the past year, which probably provided an unsustainable boost to FedEx sales, which grew by 21% in fiscal 2021. Even so, Hoexter estimates revenue will increase 8.4% for 2022 and 4.5% for 2023—and that should lead to solid earnings growth thanks to margin expansion.
From a valuation standpoint, Hoexter believes that the stock remains an attractive proposition considering that it trades at 13.6 times his 2022 earnings estimate compared with the company’s historical forward trading range of 12.5 times to 18.5 times earnings. However, Hoexter cautioned that rising fuel prices, increasing barriers to global trade, and continued unionization at the company’s Freight segment all pose risks to the company moving forward.
Those risks were nowhere in sight on Tuesday. FedEx stock was up 1.3% in recent trading, while the
had risen 0.1% and the
had advanced 0.3%.
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