By Christine Brown
Goldman Sachs has removed FedEx Corporation (NYSE:FDX) from its Conviction Buy list, while maintaining a Buy rating for the stock. Goldman analyst Tom Kim lowered his price target for the stock to $184 from $214.
However, Kim has expressed confidence that FedEx stock is still an attractive proposition. For FY16, Kim expects an EPS growth of 18 percent, while remaining Bullish about the medium and long term outlook for EPS. Kim is not worried about the higher costs related to the company’s $1.4 billion takeover of GENCO, noting that it will only be temporary.
Referring to the reasons behind FedEx’s removal from the Conviction Buy list, Kim says the company’s short-term earnings will continue to be affected by factors like weak demand for less-than-truckload shipping (LTL), higher costs for the FedEx Ground segment, and higher self-insurance reserves. Kim added, “Meanwhile, we think the selfinsurance reserves should moderate after a significant accrual was booked in 1Q. Ground’s long-term earnings power remains intact, in our view.”
In his report, Kim also mentions that in the past 6 months, FedEx stock has underperformed by 11% in comparison to the S&P 500. According to Kim, the reasons behind this underperformance are investor fears related to global growth and the FY16 guidance of the company.
Presently, FedEx stock trades at a P/E ratio of 14.1, based on projected earnings for FY16, and at 5.9x EBITDA. According to Kim, these multiples are very low for the company because its EPS prospects are highest when compared to the other transportation companies covered by his firm.
Some other risks mentioned by Kim include an impact on FedEx’s performance by the uneven industrial production growth in the US. Also weakness in US export, caused by a strong dollar, could affect the company’s International Priority Shipments.
Overall, Kim has a positive view on the stock, and he’s advised investors to buy the stock on weakness. While he’s acknowledged that missing the EPS consensus estimate has affected investor confidence, given that the company has lowered its earnings expectations, it will be easier to meet consensus estimates going forward.
Kim is not the only one with a bullish view on the shipping company. According to TipRanks, all five analysts who weighed in on FedEx in the last three months have given bullish ratings. The average 12-month price target is $186.80, marking a 25% potential upside from the stock’s current levels.
Analyst Tom Kim has a success rate of 61% recommending stocks with an average return of 12.5% when measured over a one-year horizon and no benchmark. He has rated FedEx seven times since 2012, earning a 67% success rate recommending the company with a 12.6% average return per FDX rating.