Why FedEx Is A Top Transportation Stock Pick

FedEx Corporation FDX shares initially traded lower after the company disappointed Wall Street with its fiscal fourth-quarter earnings report last week.

On Tuesday, Bank of America analyst Ken Hoexter added FedEx to the firm’s US1 list and named it his top transportation stock pick.

Valuation: Hoexter said FedEx shares currently trade at only about 13.6 times his fiscal 2022 EPS estimate, on the low end of its historical valuation range. While the stock is undervalued, he said multiple long-term tailwinds continue to build for the company, including TNT integration, business-to-consumer (B2C) e-commerce and an improving pricing environment. The company believes 88% of its future growth will be driven by B2C e-commerce shipments.

Related Link: 5 FedEx Analysts Break Down Q4 Earnings: 'We Continue To See Upside Potential'

Given the tight delivery capacity, revenue per package had been growing at a double-digit percentage pace. In addition, re-pricing of enterprise contracts will also serve as a margin tailwind into fiscal 2023, Hoexter said.

Fears Overdone: Hoexter said fears over FedEx’s rising costs are overdone, and the company doesn’t need to match the cash flow yields of competitor United Parcel Service, Inc. UPS.

“While FedEx has not generated cash flow yields on par with UPS, we believe the increased capex should support high ROIC investments in capacity, automation, and fleet renewal, and be margin accretive,” Hoexter wrote in a note.

Hoexter is projecting 17.9% EPS growth in fiscal 2022, 12.6% EPS growth in fiscal 2023 and 14.3% EPS growth in fiscal 2024.

Bank of America has a Buy rating and $372 price target for FedEx.

Benzinga’s Take: FedEx shares have taken a breather in the past month, but that may simply be because near-term expectations got too high. The stock has been an excellent longer-term investment, gaining 128% in the past year.