Wells Fargo Bullish On FedEx, UPS

FedEx Corporation FDX and United Parcel Service, Inc. UPS should both be bought by investors, according to Wells Fargo.

The Analyst

Wells Fargo analyst Allison Poliniak-Cusic initiated coverage of FedEx's stock with an Outperform rating and $189 price target.

The analyst also initiated coverage of UPS' stock with an Outperform rating and $138 price target.

FedEx: Long-Term Growth Potentials

FedEx's Express business could bottom in fiscal 2020 and rebound the year after as it transitions to become a "critical driver" of FedEx's total growth, Poliniak-Cusic wrote in the initiation note. Specifically, current profit profiles are "not the new normal" and reflects multiple challenges, including weak international volume. However, management's investments within Express and the integration of TNT are progressing to a point where the business can operate more efficiently.

Meanwhile, the Ground business could benefit from three catalysts, including: 1) improving network infrastructure and investments, 2) more volume from a seven day per week delivery schedule and 3) pricing in the business will re-accelerate over the next 18 months.

Finally, the e-commerce universe continues to expand rapidly and package volume is projected to double in size by 2026, the analyst wrote. FedEx remains well positioned to take advantage of the surge in volume and generate greater operating leverage amid recent network improvements.

UPS: Earnings Power Potential

UPS' management detailed in late 2018 its "Profit Improvement Plan" which calls for an extra $1.00 to $1.20 in EPS above its typical 5% to 10% earnings growth by 2022, Poliniak-Cusic wrote in the initiation note. These targets are not only achievable but potentially conservative due to investments in its network, including three new automated hubs.

The company's multiple investments will result in improved speed, transparency, and improving market access, the analyst wrote. Signs of success was made apparent in the third quarter report where the company increased profit by 20% on a 5% top-line growth.
Management's investments will continue through 2020 and start moderating in 2021. At that point the company's success will likely translate to more than $9 per share in free cash flow over the coming three years.

Price Action

Shares of FedEx closed around flat Tuesday at $158.01 while shares of UPS closed up 0.57% at $116.91.

Related Links

FedEx Delivers Pain To Shareholders, But Some Analysts Are Shipping Support

Stifel On UPS: Wait To Buy This 'Large, Improving Cash Flow Machine'