Trade Update Dec 19th, 3:10 pm: I initiated a delta neutral Dec / Jan calendar in FDX yesterday before earnings because I thought the push / pull setup in the FDX story made a small move post-earnings more likely. Though the stock did break out above $95 initially this morning, the stock has come back down in the afternoon as the market has sold off, and is now only up 2%.
I actually laid out the bear case for FDX on CNBC Halftime Report today, citing 3 reasons for concern in the stock:
- Declining margins as customers shift to deferred from express
- Benefits of cost restructuring won’t be felt until 2014 and 2015
- Consensus estimates of 13% EPS growth in calendar 2013 is higher than 2012 growth, in an arguably tougher global environment.
Action: Sold to Close the FDX ($94.20) Dec/Jan 92.5 put calendar at $1.33, for a $0.40 gain
Original Trade Dec 18th, 2012 at 1:33 pm:
As I wrote in my preview yesterday, the bull / bear case depends on the 2013 outlook from FDX. The stock looks cheap, but traders are worried about global growth headwinds. Given the legitimate points on both the bull and bear side, I view the probability of an up or down move at about a coin flip. However, given the richness of Dec options, using a calendar helps the odds in my favor as long as I don’t expect a big move, which I don’t.
I chose the 92.50 put calendar because of my neutrality on the earnings event. Since both the Dec and Jan13 92.50 put are 50 delta options, this is a flat delta trade that is really a bet on a lower than expected move on earnings tomorrow. Part of my thought is also technical, as the $89-90 area looks like decent support, while the recent highs around $94 might offer resistance.
Trade: Bought the FDX ($92.49) Dec / Jan13 92.5 Put Calendar for $0.93
-Sold 1 Dec 92.50 put at 1.46
-Bought 1 Jan13 92.50 put for $2.39
Trade Rationale: This trade will mark positive tomorrow if the stock is between the rough range of 89.60 and 95.40, depending on how Jan13 implied vol marks. I don’t plan to take the trade off tomorrow, but might take another action once the Dec put expires on Friday.
Earnings Preview Dec 17th, 2012 at 3:02pm:
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.
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.