Target Down for Hold-Rated FedEx

We are maintaining our Hold on FedEx Corporation (FDX - Analyst Report), but reducing our target price to $77. FDX will report 2009 fiscal first quarter results on September 18. We are continuing our fiscal 2009 diluted EPS estimate at $4.90, near the mid-point of FDX diluted guidance of $4.75-5.25.

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 reported 2008 fourth quarter EPS of $1.45 before a $2.22 per share Kinko’s impairment charge, down 24% year over year. FDX recently increased its annual dividend rate by 10% to $0.44 per share, which provides a 0.6% yield.

Worldwide economic growth, cost-cutting initiatives, and rapid business growth in Asia are expected to propel earnings growth for FDX. The rollout of FedEx counters at Kinko’s is expected to accelerate the company’s volume and topline growth. We also expect margins to stabilize due to the company’s efforts to reduce expenses.

New flights to China and new routes connecting Europe, India, China and Japan with the FedEx Express U.S. hub in Memphis further enhance FedEx Express’s service offerings between the fastest growing economies in Europe and Asia.

We see these as significant developments, as apart from strengthening FDX’s market position in China, these are expected to boost volumes, revenue and operating margins. FDX is also expanding service to both Mexico and Canada. Recent rate increases should boost revenues going forward.

Our Hold recommendation on FDX reflects our view that its valuation measures are not likely to expand in the current environment.

Read the full analyst report on FDX