Buy FedEx as it narrows gap against rival UPS thanks to ground delivery, Atlantic Equities says
It's time to buy shares of shipping giant FedEx as the company narrows its valuation gap against rival UPS, according to Atlantic Equities. The firm initiated coverage of FedEx with an overweight rating and a $265 per share price target. That equates to about 20% upside from the stock's $221.08 close Monday. "FedEx through its cost reduction programs, is shifting to a flexible, margin enhancing, ground focused integrated network. We believe this will narrow the margin and valuation disparity to UPS," analyst Oliver Holmes wrote. FedEx shares trade at a trailing price-to-earnings ratio of around 19, while UPS trades at 13, per FactSet. Holmes added UPS and FedEx "differ in financial outlook and the current ability to offset wider macroeconomic headwinds. Although we regard UPS highly, we believe it has over earned during COVID and expect its financial performance to mean revert." The analyst also noted because current Wall Street estimates are below fiscal year 2026 targets presented by FedEx executives, investors are discounting the likelihood these targets will be reached. He thinks it's more than likely those expectations will be met. "In line with management, we assume a constant operating ratio from FY23E onwards, enabling us to illustrate consensus' permanent cost out assumptions," Holmes said. "Taking this into account, there is a $2.4bn shortfall in operating expense reduction, equivalent to 2.4ppt of EBIT margin in FY26." FedEx stock has climbed steadily this year with a roughly 28% gain. FDX YTD mountain FedEx stock has climbed 28% from the start of the year. — CNBC's Michael Bloom contributed to this report.