Event: FDX reports its calendar Q4 earnings Wednesday before the open. The options market is implying about a 3.5% move post-earnings, which is cheap to the 4 qtr avg move of about 4.25%, and the 8 qtr avg move of about 4%.
Sentiment: Wall Street analysts are fairly bullish on the stock with 21 Buys, 9 Holds and 0 Sells, and an average 12 month price target of around $105. Short interest has been stable at around 2% of float for the past 6 months.
Fundamentals / Valuation: The FDX thesis is stuck between slowing global growth and a cheap valuation. The stock got a boost in October after announcing a restructuring, which was the company’s way of dealing with flagging growth.
If you believe that global growth has bottomed, then the stock looks cheap, as Goldman Sachs Research outlined in their 3 points supporting the bullish case:
1. B2C freight flows should remain resilient, with above trend growth for e- commerce driving traffic for FDX’s high margin, high return ground operations.
2. China recovery to bode well for intra-Asia airfreight activity, which should be incrementally positive for FDX in terms of volumes.
3. B2B activity has been dampened by slower industrial activity, most recently in the US due to fiscal cliff concerns. If the situation is resolved over the next 3-6 months, we would expect re-stocking to lift both ground and to a lesser extent airfreight volumes (perhaps deferred more than Express).
Given their expectations, P/E looks reasonable. Here is P/E over the past 7 years:
The key to this story lies on the E. Analysts are modeling 13% earnings growth for next year. Traders and investors are clearly expecting more difficulty on the earnings front, especially since 2012 earnings only grew 9%. As a result, the key to earnings on Wednesday will be the 2013 outlook.
Price Action / Technicals: The stock has gone nowhere in 3 years, and has traced out a very tight range throughout 2012 (basically between 85 and 95):
FDX 3 yr chart from Bloomberg
There is not much to say about the chart. The stock is near both its 50 and 200 day ma, and 85 is support, 95 is resistance.
Volatility: 30 day at-the-money implied volatility is only about 23.50 which is actually on the low end relative to the periods prior to the last few earnings announcements:
Recent realized volatility has been low, and the options include the holiday period, which is part of the reason for the cheapness. But we are looking at Dec / Jan calendars given the relatively low level of Jan13 vol.
Expectations: Here is the table of Q4 consensus expectations, along with expectations for Q1 2013 (to compare to guidance) and 2013 as a whole.
| eps | sales | ||
| Q4 | 1.41 | 10.81b | |
| Q1 | 1.45 | 10.80b | |
| 2013 | 7.19 | 44.72b |
My View: FDX has lagged other U.S. stocks in 2012 because of its international exposure and high cost base. However, it still gets 70% of its revenues from the U.S., and is closely tied to U.S. industrial production. I lie on the more skeptical side of the U.S. growth spectrum for 2013, so I’m less optimistic about the stock than most of the stock analysts. However, the key to Wednesday’s stock reaction will come from the 2013 outlook. Given that the company is in the early stages of its cost restructuring, I doubt that it wants to throw cold water on 2013 prospects just yet. So I expect benign guidance from the company.
But I don’t expect management to dismiss the global economic headwinds the company faces in 2013. Combine those push / pull factors, and I don’t expect the stock to move more than its implied move in either direction. Not sure if I’m comfortable picking a direction, but if I do, it will be with a Dec / Jan calendar trade tomorrow.