The economy is currently facing headwinds due to the Federal Reserve’s decision to raise interest rates in order to combat inflation. This situation has led to a slowdown in the stock market. However, amidst this economic uncertainty, there are companies that possess the ability to control their own destiny. One such company is the shipping giant FedEx.
Susquehanna analyst Bascome Majors recently upgraded FedEx (FDX) stock from Hold to Buy, accompanied by a substantial increase in the target price, rising from $225 to $315 per share. Majors believes that FedEx has significant long-term upside potential, primarily driven by cost rationalization and a potential valuation rerating. The company has set an ambitious goal of reducing costs by $6 billion by 2027, which, if achieved, would bring profit margins in line with those of its competitor, United Parcel Service (UPS), within the range of 12% to 13%.
Crucially, internal cost improvements can act as a counterbalance to falling volumes caused by a slowing economy. The same cyclical weakness affects both FedEx and UPS; however, FedEx has a unique advantage. Unlike UPS, which already boasts relatively high profit margins, FedEx still has room for improvement. In addition to the challenging economic landscape, UPS faces higher costs associated with a new labor contract with the Teamsters union. Consequently, Majors maintains a Hold rating for UPS shares with a price target of $160 per share.
Majors’ price target aligns with a valuation of 16 times his 2024 earnings-per-share estimate of $10 for UPS, which is slightly below the consensus call of $10.34 per share. On the other hand, his target for FedEx corresponds to 14 times his fiscal year 2025 earnings per share estimate of $22.50. It’s worth noting that FedEx’s fiscal year ends in May. Furthermore, historically, FedEx shares have traded at a discount compared to UPS shares.
In conclusion, despite the current economic challenges amplified by the Federal Reserve’s actions, FedEx exhibits strong potential for growth through internally-driven cost reductions and profit margin improvements. This distinctive self-help story positions FedEx as an attractive investment opportunity.
Play FedEx Stock Options for Limited-Risk Alternative
Susquehanna derivatives analyst Chris Jacobson suggests a way for investors to play FedEx stock options amidst economic pressures. For those with a bullish outlook but concerns about the macro/cyclical setup, Jacobson recommends considering long calls as a limited-risk alternative.
Understanding Call Options
By owning a call option or going long, investors have the right to purchase stock at a fixed price, known as the strike price, in the future. Although options cost less than the underlying stock, they may expire worthless if the stock does not trade above the strike price.
Factors Affecting Option Pricing
Several factors influence option pricing, including the volatility of the underlying stock. Volatile stocks, which experience significant price fluctuations, are more likely to trade above the strike price. Jacobson notes that FedEx currently has low volatility. However, rising volatility can increase the value of FedEx options, similar to how a rising stock price would. It’s important to note that trading options necessitates experience in this area.
Analyst Outlook and Target Prices
Jacobson does not have a rating on FedEx stock as he is the options analyst. With Majors’ upgrade, approximately 61% of analysts covering FedEx stock rate shares as Buy, according to FactSet. Comparatively, the average Buy-rating ratio for stocks in the S&P 500 stands at around 55%. The average analyst price target for FedEx stock is approximately $291 per share.
In contrast, about 50% of analysts covering UPS stock rate it as Buy. The average analyst price target for UPS stock is roughly $184 per share.
Following the upgrade, FedEx stock experienced a 0.4% increase in early Monday trading. On the other hand, S&P 500 and Dow Jones Industrial Average futures remained flat. UPS stock remained flat during premarket trading.
Looking back over the past 12 months, UPS stock has seen a decline of about 4%, while FedEx stock has witnessed an increase of approximately 75%.