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“We view the long-term upside opportunity in FDX from cost rationalization and valuation re-rating as greater than near-term cyclical risk,” they wrote in a report.
On the other hand, the analysts lowered the price target on Neutral-rated UPS (NYSE:UPS) by $13 to $160 per share. They are more cautious on UPS, citing downside risk to 2024 consensus and just modest upside to shares.
The analysts cite 3 reasons why they are comfortable with an upgrade move despite near-term cyclical risks.
1) Parcel demand: Both international and domestic parcel demand have been in recession for over a year, with volume declines already worse than during the Great Recession. Recent improvements in volume, driven by easing comps and market share gains compared to UPS, suggest that investors buying into the volume declines seen in recent quarters tend to perform well over the next 12 months;
2) Historical performance: FedEx has historically faced back-to-back fiscal year adjusted EPS declines only three times in the last 30 years and not since the global financial crisis of the late 2000s. The outlook for fiscal year 2024 already accounts for cyclical profit pressures, fully absorbing factors like the return of incentive compensation and the unwinding of pandemic pricing in international export parcels; and
3) Freight Business: Forecasts for FedEx’s Freight business are relatively conservative compared to consensus estimates for standalone peers. This could provide a buffer against some of the cyclical downside in parcel forecasts.
FedEx shares are up almost 1% in pre-open Monday.
