Analysts are feeling positive about cash flow at Fedex Corp. (FDX) as the company begins to move on from expensive pension contributions and wage hikes that dragged down the shipping firm's latest quarterly earnings. FedEx shares tanked on Tuesday after FDX missed analysts' profit expectations for its fiscal first quarter, but those who follow the stock see brighter days ahead.
"In line with our expectation, free cash is expected to benefit from reduced pension contributions, with commentary implying continued return of capital through repurchases and dividends," Keybanc Capital Markets analyst Todd Fowler wrote in a note following FDX's earnings report. "We estimate $13 million remains for repurchases, potentially representing $0.70-$0.75 not factored into our estimates." Fowler rated FedEx as "Overweight" and gave the stock a $290 price target -- well above the $241.58 that shares closed at Tuesday.
No Good Deed Goes Unpunished
FDX's latest quarterly results suffered significantly from compensation costs and pension contributions that stifled free cash flow.
"Higher variable-compensation accruals and accelerated wage increases negatively affected results this quarter by $170 million, or $0.48 per diluted share," FedEx Chief Financial Officer Alan Graf said Monday evening during the company's earnings call.
Graf explained that the company's decision to use savings from President Donald Trump's corporate-tax cuts for such things as worker bonuses are a positive long-term investment, but pressured earnings in a way that something like stock buybacks wouldn't have. For example, he said that the company's transportation unit would have seen margins increase year over year as opposed to compressing.
The cash flow issue was also hampered by massive contributions to the company's pension fund, along with charges related to risk-transfer deals with MetLife (MET) . A 10-Q filing reveals that the company contributed $250 million toward its pension plan just this month, adding to the $2.6 billion in contributions made in fiscal-year 2018.
The large-scale contributions were made in order to take advantage of changes to tax laws relating to pension contributions. The contributions, though constricting on cash flow, have led to the pension's funded ratio increasing from around 89% to nearly 100% as of the latest filing.
A Stronger Balance Sheet
An end to moves that have pressured the company's free-cash-flow statement in recent quarters means that FedEx twill have a much better balance sheet moving forward. Several analysts see that as a major upside indicator.
Oppenheimer analyst Scott Schneeberger wrote in a note that margin expansion, profit improvement and efficiency initiatives attributable to FedEx's more-nimble balance sheet bode well for the company. He said that's especially true as share repurchases and a strong holiday season look poised to bolster the company's outlook. Like Fowler, Schneeberger gave FedEx an "Outperform" rating, plus a bullish $288 price target.