We are maintaining our Hold rating on FedEx Corporation (FDX). FDX reported 2008 third quarter (February 28) EPS of $1.26, down 7% year-over-year, but above consensus and our estimate of $1.22, largely due to higher-than-expected revenue growth. Despite this, we are reducing our diluted EPS estimates to $6.08 from $6.40 for fiscal 2008 (May 31), the mid-point of FDX guidance of $7.98-$6.18, and to $6.50 from $7.25 for 2009 as we have revised our fuel and revenue assumptions.
Fuel surcharges will lag higher fuel costs, and the weak economy will hurt LTL freight, U.S. express and copy services. Remedial actions include cost-control measures and cuts in capital spending.
We believe the dividend is safe. At its current price, FedEx is trading at a discount to its peer group median based on P/E, on par with the industry median for price/sales, and below the industry for price/book. The company's consensus projected earnings growth rate matches the industry median, and its operating margin and leverage (as measured by debt/total capital) are the same as the peer group.
FDX trades at a discount to its closest peer, United Parcel Service, Inc. (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 over the next six months and reiterate our Hold recommendation. Our $95 six-month price target is based on approximately 14 ½X our fiscal year 2009 diluted EPS estimate of $6.50, providing a PEG (P/E divided by estimated future growth rate) of roughly 1.1X, in line with the median for the industry.
Read the full analyst report on FDX.
Read the full analyst report on UPS.
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