Trade Update $FDX – Taking Off Fly for Small Loss

by Enis March 20, 2013 3:41 pm • Commentary

Trade Update  March 20th, 2013 at 3:40 pm:  This is a tough decision, but let me lay out why I’m taking off the FDX trade from yesterday, and why now, as opposed to earlier in the day when it was a slight winner.  The original thesis on the FDX was that I wanted a bearish biased trade, but I expected the 100 to 110 range to hold.  So this morning, when FDX opened around 102, I felt comfortable with my original expectation, even if the earnings miss was quite bad.  The stock had broken out from 100 quite aggressively in January, and I expected late-comers to show up there.  By the afternoon, when FDX broke 100, I wanted to give it some more time to see if it was a false break.  But at this point, it’s clear that the selling aggression in FDX has made the previous support at 100 likely resistance going forward.  Now I’m essentially rooting for the stock to go higher, but with a trade that will decay, and against my original thesis.  So I’m taking my small loss now.

 Action: Sold to Close FDX ($99.00) Apr 110/105/100 Put Fly at $1.05 for a $0.30 loss


Original Post March 19th, 2013: Jump on the Express?

We’ve looked at many different structures ahead of FDX earnings tomorrow, and here’s what we finally settled on:

Trade: FDX (106.79) Bought the Apr 110/105/100 Put Fly for $1.35
  • Bought 1 Apr 110 put for 4.62
  • Sold 2 Apr 105 puts at 4.01 total (2 and 2.01 respectively)
  • Bought 1 April 100 put for 0.74

Break evens on April Expiration:
-Losses up to 1.35 above 108.65 and below 101.35, max loss of 1.35 above 110 or below 100.

-Profits up to 3.65 between 101.35 and 108.65, with max gain of 3.65 at 105.

Trade Rationale:
First off, we think implied volatility is rich relative to recent realized volatility, and especially considering that FDX has traced out a range between 100 (long-term breakout) and 110 (recent resistance) over the past month.  With that range in mind, I’d rather be selling volatility than buying it, which is why I chose the put fly rather than a calendar trade.  I think FDX is priced too rich after its recent run, but I also don’t expect the stock to immediately fall apart given the long-term significance of that 100 level, so I’m doing a fly with a slight downward bias.


Earnings Preview Mar 19th, 2013:

Event: FDX reports its fiscal Q3 earnings Wednesday before the open.  The options market is implying about a 3.5% move post-earnings, which is higher than the 4 qtr avg move of about 2.5%, but lower than the 8 qtr avg move of about 4%.

Sentiment:  Wall Street analysts are fairly bullish on the stock with 20 Buys, 9 Holds and 2 Sells, and an average 12 month price target of around $114.  Short interest has been stable at around 2% of float for the past year.  Option open interest is heavily skewed to puts, mainly due to Jan14 and Jan15 downside protection.

Fundamentals / Valuation: Here’s what I wrote ahead of last earnings in December:

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.

Since December though, the FDX P/E multiple has expanded to above 16, from around 14, a big move for FDX (the P/E has ranged between 12 and 17 for the past 2 years, as earnings growth has slowed to 10-15%).

But my main concern with FDX is the weakness in China, which dominates international trade.  While FDX receives 70% of its revenues from the U.S., a lot of that is international trade into and out of the U.S.  I mentioned some of the negative signals for global growth in my CMI trade post last week, and I don’t think it bodes well for FDX.

Price Action / Technicals: The stock had an important long-term breakout (above the 98 to 100 area shown in read) to start 2013:

20 year monthly chart of FDX, Courtesy of Bloomberg
20 year monthly chart of FDX, Courtesy of Bloomberg

The levels to watch now are 110 on the upside, which has been resistance so far in 2013, and 100 on the downside, which is the breakout level.

Volatility:  30 day implied (red) and realized volatility (blue) are both low relative to the last year:

30 day IV vs. 30 day RV, Courtesy of LiveVolPro
30 day IV vs. 30 day RV, Courtesy of LiveVolPro

Combine this low volatility backdrop with the technical setup that indicates strong support at 100, and near-term resistance at 110, and we have the ingredients for a potential trade to take advantage of that setup.

My View:  I was neutral on FDX ahead of its last earnings announcement, and traded a calendar as a result.  This time around, I’m more negative on the near-term prospects for the stock given its strong run leading up to this earnings event, and its expanded multiple (16x vs. 14x) since last earnings.  We are still looking at potential trades, and will try to post before 3pm if we pull the trigger.