Morgan Stanley: FedEx's '20/20/20' Narrative Is Gone

Since 2017, many analysts have been bullish on FedEx Corporation FDX on a "20/20/20" thesis -- $20 in EPS by fiscal 2020 that warrants a 20 times P/E multiple. Exiting FedEx's earnings report Tuesday, the "20/20/20" narrative is off the table, according to Morgan Stanley.

The Analyst

Morgan Stanley's Ravi Shanker maintains an Equal-weight rating on FedEx with a price target lowered from $230 to $156.

The Thesis

For FedEx's "20/20/20" narrative to play out, the company's Express unit needs to hit management's prior $1.2 billion to $1.5 billion in operating income guidance, Shanker said in a note. But after management revised its outlook to the downside, investors will have a hard time estimating what FedEx's normalized EPS should be.

Meanwhile, the analyst said it appears the bear case scenario for FedEx is playing out, including heightened competition, a slowing macro environment, TNT integration problems. As such, it may be more appropriate to lower FedEx's price target given new uncertainty related to normalized earnings, Express targets, macro concerns and competition.

The research firm's revised $156 price target is based on 9.5 times 2020 EPS estimates, which marks a discount to the stock's historical multiple of 14.5 times but justified given the current uncertain environment. If management "restores clarity and confidence" to its earnings outlook and if the macro environment improves, a higher stock multiple would be warranted at that time.

Price Action

Shares of FedEx were trading lower by 1.8 percent at $156.88 Friday afternoon.

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