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We believe FedEx has the ability to improve margins in its Express division. With a large revenue base at a near 30-year low in margins, the division could be a value driver over the next two years. Further, we see FedEx Ground as a winner in the US ground parcel market. That division offers exposure to fast growing e-commerce package volumes. Finally, FedEx Freight has been surprisingly profitable and may benefit from a rebound in US construction activity.
INTERMEDIATE TERM (the next 3 months or more)
We believe we are past the trough in FedEx Express margins. Cost improvements are already underway and the macro environment appears likely to be more supportive of express services demand. Estimates for fiscal 2014 should benefit from that momentum, in our view, and fiscal 4Q 2013 guidance may well be positive at the next report. We view an expanded network in Europe as a positive for FedEx Express, should the FDX end up acquiring TNT at an attractive price.
LONG-TERM (the next 3 years or less)
FedEx is a long-term position, in our view. Reorganizing the Express division is a slow process, in part because high service levels cannot be disrupted as adjustments are made. Cost reductions build through FY2016 and the long-run result may surprise to the upside. FedEx Ground has been taking market share from UPS in US ground parcel for over a decade, but those gains may well reach a tipping point in coming years. In our view, shares of FDX could offer 50% upside to fair value should the margin expansion at FedEx Express match its competitors'.
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