There is potential for FedEx Corp.’s stock to be a winner next year despite a currently bleak view of the name on Wall Street, says Bernstein analyst David Vernon.
FedEx
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shares have shed 31% so far in 2022, nearly double the losses sustained by the S&P 500
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over that same span. The various challenges endured by the company over the past year have caused investors to lose faith in the FedEx story.
“‘[FedEx] started the year in relatively better shape, but after following up a bullish set of investor day targets with a material guide down to consensus forecasts the market has given up hope in the business, the team, and any chance of fundamental change.’”
FedEx saw “a faster-than-expected negative turn in the airfreight market which caught the company flat-footed,” Vernon wrote in a Tuesday note to clients. The company also “kept its larger fleet flying through the dip and paid for it with lower average yields,” in contrast to rival United Parcel Service Inc.
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Although sentiment toward FedEx’s stock is “as weak as we have ever seen it,” Vernon and his team are feeling incrementally more upbeat about the FedEx narrative, bumping their price target up to $226 from $212 and keeping an outperform rating on the stock in the note, which is titled “Escape from the Island of Misfit Stocks.”
In their view, FedEx has the opportunity and the ability to turn things around.
“We continue to believe the problems at Express (right sizing of capacity to raise average yield to a higher price point) and Ground (move to more fully allocated costs) are fixable, and see good reasons to want to be invested in parcel through the next cycle (differentiated revenue growth and improving margins),” the Bernstein analysts wrote.
They think the stock is undervalued, “trading at the lower end of historical ranges despite a material move lower in forward estimates,” they wrote. They acknowledge that “while the first cut may not be the last cut,” FedEx wasn’t a great performer heading into this year and yet it has “room to make up on execution at Express and pricing in Ground.”
“We further see longer term optionality in the business and believe the company could unlock value by divesting non-core assets,” the analysts wrote.
The company is due to post quarterly results next Tuesday, and looking ahead to that report, the Bernstein analysts think FedEx could deliver “modest” upside, in part due to early momentum with its Express-related tweaks.