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These 2 Air Transport Stocks Could Be in for Some Sky-High Profits

A strengthening economy, which should come into play in 2024 as the result of a cessation of interest rate increases, and eventual cuts, should benefit not only cash strapped small businesses, but the consumer as well. And if there is one thing a consumer does in the U.S. it’s spend any excess cash. That spending boost should give a lift to shippers like FedEx, and shipping dependent Aercap.

The verdict is in. Well, mostly. As in the vast majority of stock commentators believe Federal Reserve Chair Jerome Powell has pulled off a rare feat…the proverbial “soft landing”. That means the Fed has been able to raise interest rates, in order to staunch inflation, without driving the economy into a recession.

And, if the prognosticators are correct, the economy could be in for an uptick in 2024 as interest rates ease, but job growth remains stable. That means a recovering consumer, increasing purchasing power, and more consumer goods shipped via air freight. Which, ultimately means good news for Federal Express (FDX), and Aercap Holdings (AER)

If you remember, just over a year ago in September of 2022, Federal Express (FDX) CEO Raj Subramaniam joined the chorus of economic prognosticators and predicted an impactful global recession was just over the horizon. This sent FDX to lows, around $150, that it hasn’t seen since that incorrect economic call. 

While Subramaniam was off in his recession prediction, the fear of an economic decline did have a positive impact at FedEx, with the company becoming laser focused on slashing costs through what it called its DRIVE Program. And, while predictions of recession sent FDX reeling, lower interest rates in an improving business environment in 2024, combined with its now leaner structure, could see the stock break through highs of a years long range at around $320.  

In its latest earnings release, Subramaniam praised the company’s DRIVE Program stating, “FedEx has delivered an unprecedented two consecutive quarters of operating income growth and margin expansion even with lower revenue, clear evidence of the progress we are making on our transformation as we navigate an uncertain demand environment.”

In the quarter the company completed a $500 million share repurchase program, and announced a $1 billion share repurchase program for 2024. FedEx closed out the quarter with $6.7 billion in cash and cash equivalents. 

FDX is a B on our buy rating scale in our POWR Ratings, where it clocks in at 91.39%. The company’s highest component score is in the Quality rating, with an almost 86% ranking.

Another company which should see an uptick in business as rates ease is Aercap (AER). Aercap has benefited from the post pandemic burst of travel, and should continue to benefit from an uptick in cargo transport in a rising economy. 

Aercap’s business is in leasing and maintaining a fleet of aircraft, over 1,700 of them, ranging from massive cargo planes to 737 passenger jets, to helicopters for transport. The company has been able to take advantage of a trend to lease aircraft which has tripled in size over the past 20 years. 

In it’s latest quarter Aercap announced it had repurchased $1.2 billion worth of stock, authorized another $500 million for repurchase, had a return on equity (RoE) of 27% in the quarter, achieved a 24% margin on asset sales (the company sells off older model aircraft as it brings new ones on board), and reduced its debt to equity ratio from 2.51 to 1. It also increased the book value of the assets it holds by 21% YoY. 

With all that, the stock trades at a PE just under 7, and that with operating margins of close to 47%.

While the stock performed well in 2023, the position management has placed the company in should bode well for any easing of interest rates, and even a slight uptick in the economy, as a result. AER is currently trading near all time highs at just under $75, but could easily push toward the century mark in an improving economic environment. 

The company is currently rated a B overall in our POWR Ratings, where it rates above 92.22% of the stocks we track. Its highest score is in the Sentiment component where it has an impressive 95.6% rating. 

Easing rates, which again seem to be a question of when and how much at this point, as opposed to “if”, should be a staple of mid-2024. And any easing, which should begin to restimulate growth, should lift both FedEx and Aercap as the year progresses.

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FDX shares were trading at $248.06 per share on Tuesday afternoon, down $0.53 (-0.21%). Year-to-date, FDX has declined -1.94%, versus a -0.23% rise in the benchmark S&P 500 index during the same period.

About the Author: Steven Adams

After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA.


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