Update w/ New Trade – FDX: Fiscal Q1 Preview & Thoughts

by Dan September 17, 2012 3:39 pm • Commentary

Update W/ New Trade Sept 17th, 2012 at 3:39pm:  In an effort to avoid a binary situation, long Sept premium into an event, I decided to look at verticals in Oct as the company is also hosting an Oct 9th investor meeting that should keep vol bid.  

TRADE: FDX ($89) Bought the Oct 87.50/82.50 Put Spread for 1.05

-Bought 1 Oct 87.50 Put for 1.62

-Sold 1 Oct 82.5 Put at .57

Break-Even on Oct Exp:

-Profits btwn 86.45 and 82.50 make up to 3.95, max gain at or below 82.50 0f 3.95.

-Losses of up to 1.05 btwn 86.45 and 87.50 with max loss of 1.05 above 87.50.

Conviction Level: This is a 1% position, as I have no way of knowing whether the company will guide down, but vol is cheap with 2 events in Oct.



Original Post 3:04 PM EDT – SEPTEMBER 17, 2012: Name That Trade – FDX: Fiscal Q1 Preview & Thoughts

Event: FDX reports fiscal Q1 tomorrow morning before the open.  The Implied move in the options market is only about 2% vs the 4 and 8 qtr avg of 5.5% and 4.2% respectively.  The implied move is  muted due to the fact that on Sept 4th the company guided earnings for Q1 down to 1.37 to 1.43 a share from their previous guidance of 1.45 to 1.60, bringing the mid point down by about 8%.  The company cited global economic weakness and “constrained revenue growth at FedEx Express” for the miss.  IF FDX reports less than 1.46 a share, this will mark the first year over year quarterly decline since the bottom in Q2 2009 (the bottom, meaning the big bottom).

Options prices clearly suggest that the earnings pre-announcement earlier in the month was the main event and that the company’s Q2 is less important for the stock.  

Price Action/Technicals:  While the stock has under-performed the SPX ytd (up 6.8% vs 16% for SPX) it has out-performed the Dow Jones Transport Index by almost 4%.

[caption id="attachment_16754" align="aligncenter" width="490" caption="TRAN vs SPX vs FDX from Bloomberg"][/caption]


Technically, FDX is sitting right on its 200 day moving average, and right below the uptrend that had been in place from last years lows, right up to the pre-announcement.  The stock almost touched $85 two weeks ago and held what appears to be a fairly significant support line at that level.

[caption id="attachment_16755" align="aligncenter" width="490" caption="1 yr FDX chart from Bloomberg"][/caption]


MY VIEW:  FDX is by no means an expensive stock trading at about a market multiple of ~13x fiscal 2013, and a nice discount to UPS, but given their almost 30% revenue exposure outside the U.S., their exposure to premium express services and international freight, FDX’s business is not likely to turn on a dime, and the guidance for fiscal Q2 likely holds the key to whether or not the stock holds that $85 level in the near term.

Here is one little trade that looks interesting to me, but I am going to pass on it, because it is a sort of binary trade.  With vol so low into the earnings event, some may be tempted to buy some premium and pick a direction.   Given the technical support at $85, the Sept 87.50/85 Put Spread offered at .35 (stock ref 89.25) looks very attractive if you thought lowered forward guidance could pressure the stock. This trade breaks-even down about 2.2% or inline with the implied move, and offers profits of up to 2.1o if the stock was $85 or lower on this Friday’s close.  But I am not sure that gives me enough time for the thesis to play out, especially in a market where the few dips we have are being bought.

Very little of what the ECB and the U.S. Fed said or did in the last couple weeks is likely to help the fates of company’s like FDX in the near term, and very possibly artificially inflate the price of oil creating further headwinds.   But I am going to try a new one on you people and one that I think makes sense given where vol is in Sept and Oct, meaning there are few options that look attractive to sell.

I want to post this so those can consider different trades that may make sense for u, hopefully I will find a trade that I like and will post prior to the close.