Goldman Sachs Upgrades FedEx (FDX) to Conviction Buy

Goldman Sachs upgraded FedEx (NYSE: FDX) from Neutral to Conviction Buy with a price target of $211.00 (from $173.00). Analyst Tom Kim has increased confidence in EPS growth.

."On our estimates, its two-year forward EPS CAGR should be 27%, among the highest in our coverage. We believe there are three key drivers: (1) execution on “self-help” in Express; (2) a stronger pricing cycle in Freight; and (3) a better contributions from Ground due a favorable near-term outlook for peak season and long-term positive mix effect from ecommerce," said Kim.

" Headwinds in Express are abating, in our view, while $1.6bn in “self-help” initiatives remain on track to drive 60% incremental margins. Freight is also under earning, but as LTL pricing accelerates, margins should expand," continued the analyst. "After two years of flat margins, we see FDX delivering 3.5pp of margin expansion from F2014-F2017E on strong incremental margins in Express (63%), Ground (19%) and Freight (13%). We see 5%/10% upside potential to consensus F2016/F2017E EPS."

"FDX trades at 16.7x NTM P/E, a 1.6 turn discount to the group despite its leading EPS growth. We now apply a 20x multiple to our forward P/E to derive our new 12- month $211 price target. We note in the last up-cycle (F2003-F2006), FDX’s margins expanded by 2.8pp, EPS grew at c.30%, and its multiple peaked at 21.9x, implying upside to our valuation if FDX executes on its margin goals," he added.

For an analyst ratings summary and ratings history on FedEx click here. For more ratings news on FedEx click here.

Shares of FedEx closed at $167.78 yesterday.

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