FedEx to Keep Holding Steady
We are maintaining our Hold rating on FedEx Corporation (FDX). FDX reported 2008 third quarter (February 28) EPS of $1.26, down 7% year-over-year, but above consensus and our estimate of $1.22, largely due to higher-than-expected revenue growth. Despite this, we are reducing our diluted EPS estimates to $6.08 from $6.40 for fiscal 2008 (May 31), the mid-point of FDX guidance of $7.98-$6.18, and to $6.50 from $7.25 for 2009 as we have revised our fuel and revenue assumptions.
Fuel surcharges will lag higher fuel costs, and the weak economy will hurt LTL freight, U.S. express and copy services. Remedial actions include cost-control measures and cuts in capital spending.
We believe the dividend is safe. At its current price, FedEx is trading at a discount to its peer group median based on P/E, on par with the industry median for price/sales, and below the industry for price/book. The company's consensus projected earnings growth rate matches the industry median, and its operating margin and leverage (as measured by debt/total capital) are the same as the peer group.
FDX trades at a discount to its closest peer, United Parcel Service, Inc. (UPS), as measured by P/E, price/sales, and price/book, reflecting UPS's higher operating margin, profitability and dividend yield. We see limited upside potential over the next six months and reiterate our Hold recommendation. Our $95 six-month price target is based on approximately 14 ½X our fiscal year 2009 diluted EPS estimate of $6.50, providing a PEG (P/E divided by estimated future growth rate) of roughly 1.1X, in line with the median for the industry.
Premium Price for AvalonBay
Fourth quarter funds from operation (FFO) increased 8.6% compared to the year earlier period. Growth was driven by higher rental rates, modest expense increases and contributions from new developments. The AvalonBay Communities, Inc.'s (AVB) portfolio continues to perform at the top of its peer group due to AVB's quality asset base which is concentrated in good long term markets. However, we continue to rate AVB shares a Hold due to a still-high comparative valuation and what could be worsening multi-family fundamentals.
More and more rental stock is being put back into the market, as people are failing to sell their homes and condos. In addition, job growth, the major precursor to apartment demand, is moderating and will continue to drop in 2008. AvalonBay continues to trade at a substantial premium to its apartment peer group. Shares have fallen over the past six months due to a sector-wide sell-off in response to a weakening economy.
AVB currently trades at a 34% premium to the Zacks apartment REIT weighted average 2008 FFO estimates and now an 8% discount to our calculated NAV (net asset value). Fundamentals are still good and the company is pushing rents while holding stable occupancy.
We rate AVB a Hold due to valuation and the possibility of a continued US economic slowdown. More unsold condos and single family homes will continue to enter the market and we expect occupancy and rental rate increases to moderate in the coming months.
