Jefferies raises FedEx rating on incremental cost cuts

Investing.com -- Jefferies has upgraded FedEx (NYSE:FDX) to Buy from Hold, citing the company’s significant cost-cutting initiatives and their potential to drive continued earnings growth despite a challenging macroeconomic environment. 

The firm believes that FedEx’s idiosyncratic cost transformations, including Network (LON:NETW) 2.0 and the Tri-Color Initiative, will be key contributors to profit growth over the next two years.

In a note to clients, Jefferies emphasized that while the market remains focused on macro concerns such as tariffs, consumer sentiment, and the industrial economy, investors are overlooking the transformational changes happening within FedEx. 

Jefferies analyst wrote, "With the market overly distracted by the broader macro, we think investors are ignoring the idiosyncratic cost transformation going on at FDX under the surface."

Despite challenges in the industrial sector, Jefferies forecasts that FedEx can continue to grow earnings per share (EPS) due to its cost-reduction efforts, including the DRIVE program. 

The company’s cost-saving initiatives have already delivered $1.5 billion in operating profit in FY25.

More importantly, Jefferies says Network 2.0 and Tri-Color Initiative will contribute significantly to profit growth through FY27, with $2 billion in additional savings from Network 2.0 alone.

Jefferies sees FedEx's stock as undervalued, with a 12-month price target of $275, based on a 13.5x FY26 EPS multiple. 

This target is said to reflect a strong risk/reward scenario, as the stock is currently trading at 11.5x FY26 EPS, at the lower end of its historic range.

Overall, Jefferies sees FedEx as well-positioned to outperform in the coming years, driven by its cost-saving initiatives and potential industrial sector recovery.