Analyst On FedEx Guidance: 'As Long As This Happens Every Quarter, We're Happy'

FedEx Corporation FDX reaffirmed guidance Tuesday for $1.2 to $1.5 billion in operating income improvement in its Express division and said a U.S. tax cut could add $4.40 to $5.50 to its EPS, according to Loop Capital Markets.  

The Analyst

Loop Capital Markets' Rick Paterson maintains a Buy rating on FedEx's stock with an unchanged $260 price target.

The Thesis

FedEx's top- and bottom-line beat in its second-quarter report is "fairly encouraging" for the stock and supported by a strong macro environment and improved pricing, Paterson said in a research report. (See the analyst's track record here.) 

Perhaps more important is the fact that management "maintained line of sight" by reaffirming its guidance of a $1.2 to $1.5 billion operating income improvement in fiscal 2020 versus 2017's level. "As long as this happens every quarter, we're happy," Paterson said. 

FedEx quantified the potential impact from the tax reform bill on its EPS, according to Loop. FedEx estimates that on an EPS base of $11.75 — the midpoint of its 2018 guidance — the tax cut would add $4.40 to $5.50 per share. Encouragingly, the company's fiscal year ends in May, so these estimated benefits only reflect a five-month period, Paterson said. 

"Assuming the bill becomes law, FedEx management expects a stronger economy, more hiring and telegraphed higher capex," the analyst said. "The capex piece is particularly interesting because, while the bulls on the stock won't mind FedEx accelerating some of its fleet modernization plans, the bears may see the immediate expensing of capex as catnip to a company with a shiny new aircraft addiction."

Bottom line, the analyst's $260 price target is based on a 15.5x 12-24 month EPS estimate of $16.81, but would be subject to "significant" change assuming tax reform becomes a reality.

Price Action

Shares of FedEx hit a new all-time high of $253.24 Wednesday morning and were last seen trading at $247.81, up 2.17 percent. 

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