FedEx: Better Growth, Bigger Dividend a Good Reason to Buy

FedEx (FDX) wowed the market with its earnings and guidance yesterday. The results were so good, in fact, that the folks at RBC Capital Markets upgraded FedEx’s shares to Buy all the way from Underperform.

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RBC’s John Barnes and team list three reasons for the upgrade:

1. Based on management's tone over the past few months, we believe FedEx will be successful in re-engineering its profit improvement plan to extract a greater level of costs from the network. This change in strategy gives us greater confidence in the company's ability to deliver the bulk of its profit improvement targets and ultimately significant earnings growth over a multi-year timeframe.

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2. While the growth from Ground and Freight pales in comparison to the expected increase in Express operating income, it is important to note that both divisions appear to be on solid footing.

3. The expected profit improvement at Express combined with steady growth from Ground and Freight should drive a significant improvement in FedEx’s free cash flow profile. Based on management's tone and reinforced by recent activity, we expect FedEx to materially increase the return of capital to shareholders through both share buybacks and dividend increases.

Wunderlich’s Nicholas Bender thinks FedEx’s results bode well for Old Dominion (ODFL), Con-way (CNW) and Saia (SAIA):

We expect all less-than-truckload carriers to benefit in 2Q14 from the same trends that carried FedEx Freight to a banner 4Q14. This includes Hold-rated Old Dominion, which will continue to grow at well above market rates, and Buy-rated Con-way, which we believe can leverage a strong 2Q14 to prime the pump on margin enhancement efforts. Our favorite name in the space remains Saia (SAIA-$42.92, Buy), which will once again see accelerating tonnage growth in 2Q14. Though tonnage growth will moderate in  2H14 due to steeper comps, there remains considerable potential for the company to boost yield and continue winning incremental business with new accounts.

Shares of FedEx are little changed at $148.93, while Old Dominion has dipped 0.1% to $63.19, Con-Way has gained 0.4% to $48.93 and Saia has dropped 0.4% to $42.76.