$FDX Earnings Preview

by Enis June 18, 2013 10:18 am • Commentary

Event: FDX reports its fiscal Q4 earnings tomorrow before the open.  The options market is implying about a 4% move post-earnings, which is higher than the 4 qtr avg move of about 3.5%, but lower than the 8 qtr avg move of about 4.5%.

Sentiment:  Wall Street analysts are fairly bullish on the stock with 21 Buys, 9 Holds and 2 Sells, unchanged from 3 months ago prior to the previous earnings report.  The average 12 month price target is around $114.  Options open interest is still heavily skewed to puts (1.5 to 1) due to large put option interest in Jan14 and Jan15.

Fundamentals / Valuation: On its most recent earnings report in March, FDX management outlined the difficulty it faced as international customers shifted volumes from priority shipping to economy shipping.  Here was the opening quote from that press release, by CEO Fred Smith:

The third quarter was very challenging due to continued weakness in international freight markets, pressure on yields due to industry overcapacity and customers selecting less expensive and slower-transit services.  In response, beginning April 1, Fedex Express will decrease capacity to and from Asia and will aggressively manage traffic flows to place low yield traffic in lower-cost networks.  We are currently assessing how these actions may allow FedEx Express to retire more of its older, less-efficient aircraft.  We remain focused on our strategic cost reduction programs, which are ramping up and on track.

While FDX makes 70% of its revenues in the U.S., and only 30% internationally, the international business is the lucrative area for earnings, and for future growth potential.  In that regard, the weakness in international markets has weighed on FDX business.

After its more than 10% decline from its March highs, the stock is valued around 16 P/E.  Analysts are optimistic because of the outlook for 2014, when earnings are projected to grow 25% (vs. 6% this year).  But I’m less optimistic.  FDX grew earnings 7% in 2012 and is projected to grow earnings 6% in 2013.  If Asian growth does not rebound, FDX will have trouble in 2014 as well.

Price Action / Technicals: The stock is at an important long term inflection point.  The 97.50-100 area was resistance for many years, until the stock finally broke out to start 2013.  That turned out to be a false breakout, and the stock is back to the breakout area before tomorrow’s earnings:

5 year weekly chart of FDX, with red line around 98.50, Courtesy of Bloomberg
5 year weekly chart of FDX, with red line around 98.50, Courtesy of Bloomberg

On a shorter time frame, the stock traced out a range between 90 and 110 so far in 2013.  The 200 day moving average is around 95, while the 2 month high for the stock is around 103.

Volatility:  Vol is up into the event and at or above its highs over the past year.

Screen Shot 2013-06-18 at 8.13.42 AM
from LiveVol Pro

July vol is about 28. Expect it to come down to about 20 following the event. So a fairly substantial move on a percentage basis.

My View:  I recently traded FDX from the short side, getting out 2 weeks ago for a decent gain.  While my longer-term view is still bearish, we are unlikely to do anything ahead of tomorrow’s earnings report since the stock is not at a great entry point for another short-side trade.  But business trends are clearly working against FDX, and the price action has turned since the spring.  If the stock gets a strong earnings bounce, that might be an opportunity for a trade to fade.