From the February 2010 issue of Research Magazine • Subscribe!

February 1, 2010

Package & Freight Transportation: Improving Trends

Some companies are poised for growth thanks to strengthening volumes, industry consolidation and their unique competitive advantages.

Thomas R. Wadewitz
J.P.Morgan
212-622-6461
thomas.r.wadewitz@jpmorgan.com

We continue to have a broadly constructive view of transports based on our expectation of growth in the economy and in transport volumes in 2010. Our sense is that there is room for stronger-than-expected volumes to drive upside in EPS for many of the transports.

We have favorable views on the parcel, truckload, and railroad groups while we remain cautious on the non-asset and the less-than-truckload freight delivery or LTL groups.

Parcel names present the most compelling opportunity. We believe that UPS and FedEx (FDX) are among the most compelling transports because they should both realize significant operating leverage as volumes improve and improving weight/piece and product mix should also support strong margins. UPS is also interesting in the sense that it appears to reflect generally low expectations.

Pieces are in place for a significant turn in the truckload market. While pricing may only be modestly positive in 2010, we expect rising utilization to drive improved EPS performance for the truckload group.

We believe that Knight Transportation (KNX) and Werner Enterprises (WERN) are attractive truckload names to own. We also expect improvement in the intermodal market, and we continue to believe that reward to risk for J.B. Hunt Transport Services (JBHT) is compelling.

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William H. Fisher, CFA
Raymond James & Associates
404-442-5858
William.Fischer@RaymondJames.com

FedEx (FDX) reported previously released F2Q EPS (November) of $1.10, including a ~$0.05 self-insurance gain. As inferred in its earlier release, international priority (IP) volumes surged, rising 5.8% with domestic overnight boxes rising 6.3%. Inventory restocking, shipments of small electronic goods, and market share were catalysts. Not only has FDX (rated Market Perform 3) gained share from DHL's domestic departure, we believe it is also gaining on international volume.

We believe that the freight operation remains a key "lynchpin" in FDX achieving FY11consensus of $4.55 in our view. Freight generated $460 million of profit in FY07 and lost $12 million in that latest quarter. Freight appears to be likely gaining even more share from YRC Worldwide (YRCW/Underperform) as volumes rose 3% in the quarter but "double digits" in November.

FDX ground similarly posted improved volume trends up 3.7% with profits up 12% on nice margin expansion. SmartPost continued its torrid growth, up 63%, though it represented only 1.5% of company revenue. Overall ground operations represented 42% of 2Q profits.

Based on all the aforementioned "moving parts" we are raising both our FY10 and FY11 EPS estimates to $3.60 and $4.55, respectively. Improving economic trends as well as continued competitor struggles should provide meaningful catalysts to volume -- and hopefully price -- in the near term. That said, even using a $5/share 2011 EPS estimates, we believe the shares discount a lot of forecasted improvement.

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Helane R. Becker
Jesup & Lamont Securities Corp.
212-918-0478
hbecker@jesuplamont.com

We are maintaining our Buy rating on the common shares of FedEx Corp. and our $100 price target and would recommend using the current pullback as a buying opportunity.

For the May 2010 fiscal year, management believes it will earn between $3.45 and $3.75; we are estimating EPS of $3.49, and are not adjusting the estimate at this time. Our third quarter EPS estimate is $0.63 vs. $0.31 last year and the current consensus estimate of $0.85, although that will come down to about $0.65.

Management indicated they are seeing positive momentum in the global economy which is consistent with the fact that the company reported a 6% increase in international priority volume for the second quarter. Total average daily package volume was up by 4% in the quarter. If the trend continues into the third quarter, there would be some room a better than expected third quarter earnings report.

The company pre-released the earnings results last week as the original guidance was for EPS of $0.70 to $0.95. The better-than-expected earnings were due to greater than expected IP and ground volumes and continued strong cost controls.

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