FedEx Setting Decent Goals

We are maintaining our Hold on FedEx Corp. (FDX), but raising our target price to $90. In line with earnings guidance provided on September 9, FDX reported 2009 fiscal first quarter (August 31) EPS of $1.23, which was up from earlier guidance of $0.80-$1, but down 23% year over year, largely due to a 66% increase in fuel costs.

We are raising our fiscal 2009 (May 31) diluted EPS estimate to $5.25 from $4.90, the high end of FDX diluted EPS guidance of $4.75-5.25 and initiating our fiscal 2010 estimate at $6. Fuel surcharges will lag record high 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. FDX recently increased its annual dividend rate by 10% to $0.44 per share, which provides a 0.5% yield.

FDX's long-term goals include: (1) grow revenue by 10% per year (8% in fiscal 2008); (2) achieve a 10% operating margin (7.4% in fiscal 2008); (3) increase EPS by 10-15% per year (down 13% in fiscal 2008); and (4) increase cash flow and returns.

Worldwide economic growth, cost-cutting initiatives, and rapid business growth in Asia are expected to propel earnings growth for FDX. Recovery of the global economy will be a key factor in the performance of the company's stock. The rollout of FedEx counters at Kinko's is expected to accelerate the company's volume and top-line growth by increasing demand for its services across all business segments. We also expect margins to stabilize due to the company's efforts to reduce expenses

BT Group Advantages Priced In

BT Group Plc (BT) reported 1Q08 with in-line revenues and lower than expected earnings, helped by a lower effective tax rate. The company is moving ahead with the expansion of its 21CN network.

The company recently announced plans to invest '1.5 billion to make fibre-based, super-fast broadband available to as many as 10 million homes in the UK by 2012. BT Global continues to execute well, winning deals valued at '8.2 billion in the trailing-twelve month period. The company has been able to expand EBITDA margins due to its restructuring efforts, although pricing pressure is causing traditional revenues to decline.

Shares of BT are currently trading at 6.3x our 2009 earnings estimate of $4.69 after we have raised our currency expectations for the British Pound against the US Dollar to $2.05 per '1, compared to our previous $1.95 per '1 expectation.

We believe BT should trade at 6.61x our fiscal 2009 earnings estimate, which gives us a target price of $31.00 over the next six months. We continue to rate shares of BT a Hold and continue to believe that BT will perform well in the US Markets as the US Dollar has remained weak against the British Pound and Euro and as most of its revenues come from Europe.

Primedia Business Stabilizing

The advertising revenue in Primedia, Inc.'s (PRM) core Apartment Guide business (68% of the company's second-quarter revenue after the sale of the Enthusiast Media and the Auto Guides businesses) appears to be stabilizing' after having fallen for three consecutive quarters as the softening housing market slows condo conversions, and shrinks the business customer base.

Meanwhile, we expect cost-cutting efforts, including the consolidation of Primedia's six NYC offices into one to bolster declining EBITDA. Nevertheless, we expect the slowing economy and battered housing market to turn revenue growth negative in the company's two other businesses, which together generate 32% of its revenue. And we don't foresee a meaningful near-term recovery in weak industrywide ad trends or the company's revenue. We keep our Hold rating on the stock with a six-month target price of $3.25.

Rio Tinto Eyes to China

As a foreign supplier to the Asia-Pacific region, Rio Tinto Plc (RTP) is benefiting from China's status as a net importer of iron ore. The company is focused on boosting output to meet China's increased consumption levels. Moreover, with a positive outlook on most metal prices, we expect solid long-term revenue growth.

The company's primary focus remains on organic growth, exploration and opportunistic value acquisitions. With the acquisition of Alcan Inc., Rio has become a global leader in the aluminum industry with large, long-life, low-cost assets across the globe and a strong pipeline of attractive growth projects.

However, cost pressures due to ongoing supply constraints are adversely impacting Rio's margins and profitability. Also, significant capital spending on its expansion and development projects might put pressure on near-term free cash flow generation. We reiterate our Hold recommendation on the stock.

On September 2, Rio Tinto announced that it has signed two joint venture agreements with CODELCO's 100% owned subsidiary, CCM Los Andes, in Chile.