Do FedEx Analysts Know Something Investors Don't?

It's been a fairly rough month for FedEx (NYS: FDX) shareholders. At first glance, the nearly 4% decline in share price since early August appears warranted. The downward fiscal Q1 guidance FedEx management announced on Sept. 4 was the latest in a string of "negatives" for the global delivery and logistics leader. So what's all this talk from analysts about FedEx upgrades and target share prices well above existing levels?

Management guidance
The recent fiscal Q1 earnings guidance issued by FedEx management is still affecting its stock price two days after the fact. Rather than the $1.45 to $1.60 a share in earnings for fiscal Q1 of 2013 it initially suggested, FedEx now expects to generate around $1.40 a share when results are announced Sept. 18. Not surprisingly, investors haven't taken kindly to the news of lower-than-expected earnings, and the stock price is down-again.

The culprit behind the downward guidance is the usual -- a poor global economy affected earnings, even more than FedEx expected. This is, and will continue to be, an ongoing theme for FedEx in the near future as it assimilates a number of international acquisitions. Forays into Brazil, France, and Poland -- in addition to existing international operations -- will generate incremental growth down the line. But for now, the impact of global operations are negative and will remain so in the near term.

Near-term concerns
FedEx's existing international operations, along with the recent acquisitions, will remain a drag on short-term earnings for a couple of reasons. First off, the global economic woes remain a hurdle for every company with international operations, and FedEx is no exception. Secondly, integrating systems and operations of newly acquired companies takes time, and money. Just as fiscal Q4's $134 million aircraft impairment charge affected FedEx earnings, don't be surprised to see similar one-time charges in Q1 related to the buyouts.

Internally, managing expenses is a recurring theme for FedEx CEO Fred Smith, and it has been for some time now. But the recent acquisitions are only one reason significantly minimizing overhead won't happen in the immediate future. As CFO Alan Graf put it last quarter: "[W]e face certain cost increases in fiscal 2013. These headwinds include higher employee-related costs, including higher pension expenses of approximately $150 million."

How does FedEx stack up?
By most financial measures, FedEx handily beats industry leader UPS (NYS: UPS) in terms of investor value. FedEx's trailing P/E of 13.49 compares favorably with the nearly 18 times earnings UPS currently trades for. Looking forward, FedEx is trading at a mere 10.17 P/E, versus UPS's 13.87. Price-to-book and price-to-sales ratios are also clearly in the FedEx corner.

FedEx naysayers will point out the hefty advantage UPS holds in key management areas, including gross, operating, and net profit margins -- and they're right. However, considering the aforementioned impact of immediate expenses on FedEx's bottom line, lower margins in the near term aren't surprising.

Apparently, analysts are taking a similar, positive view of FedEx, in spite of lower earnings expectations and pressure from global markets. Bank of America's Merrill Lynch unit reiterated its buy rating, even while lowering the price target to $100. At the same time, Goldman Sachs, R.W. Baird, and UBS AG have suggested price targets for FedEx in the $102 to $110 range. At the existing $86 (give or take) share price, any of the above will work nicely for FedEx shareholders.

If there's one gripe I have with FedEx, it's the anemic dividend it pays shareholders. Compared with UPS's 3.10% dividend yield, the 0.64% FedEx pays out to its owners is minimal at best. There's an easy remedy, however. With more than $2.8 billion in cash on the books the end of fiscal Q4 (possibly less now after the acquisitions), and only 317 million shares outstanding, FedEx wouldn't have to dig too deep into the coffers to bump the dividend yield up.

For investors willing and able to take a long-term perspective, the positive sentiment surrounding FedEx -- even as the stock price drifts lower -- is well founded. After all, when's the time to buy? When prices are depressed, which is what FedEx has done with the recent acquisitions -- positioning itself for growth in fiscal 2013 and beyond. Investors would be wise to do the same.

FedEx certainly sees the mid- and long-term growth opportunities that emerging international markets offer. One option worth considering, particularly if exposure to international markets is underrepresented in your portfolio, are ETFs. For a few global ETF opportunities, take a look at our special free report "3 ETFs Set to Soar During the Recovery."

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Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. The Motley Fool owns shares of Bank of America. Motley Fool newsletter services have recommended buying shares of Goldman Sachs and FedEx. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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