Limited Near-Term Upside for FDX

We are maintaining our Hold on FedEx Corporation (FDX - Analyst Report). In line with May 9 guidance, FDX reported fourth quarter EPS of $1.45 before a $2.22 per share Kinko’s impairment charge, down 24% year over year.

We are reducing our fiscal 2009 diluted EPS estimate from $6.50 to $4.90, near the mid-point of FDX diluted EPS guidance of $4.75-5.25 as we have revised our fuel and revenue assumptions. Fuel surcharges will lag record high fuel costs, and the weak economy will hurt LTL freight, US express, and copy services. Remedial actions include cost-control measures and cuts in capital spending. FDX recently increased its annual dividend rate by 10% to $0.44 per share, which provides a 0.5% yield.

Worldwide economic growth, cost-cutting initiatives, and rapid business growth in Asia are expected to propel earnings growth for FDX. Apart from economic growth, the rollout of FedEx counters at Kinko’s is expected to accelerate the company’s volume and top-line growth. We also expect margins to stabilize due to the company’s efforts to reduce expenses. New flights to China will strengthen FDX’s market position. Finally, FDX is taking steps to reduce its cost structure.

FDX trades at a discount to its closest peer, UPS (UPS), as measured by P/E, price/sales, and price/book, reflecting UPS’s higher operating margin, profitability, and dividend yield. We see limited upside potential. Our $82 six-month price target is based on approximately 16 ¾X our fiscal year 2009 diluted EPS estimate of $4.90 and 14X our preliminary 2010 estimate of $5.85 per diluted share, roughly in line with the industry.

Read the full analyst report on FDX

Read the full analyst report on UPS