New Trade $FDX – Delayed International Delivery

by Enis June 28, 2013 1:38 pm • Commentary

FDX is a name that we have been negative on for the past 3 months.  Its growth over the past several years has been tied to its international business, which has been under obvious strain in the past 6 months.  This is what I wrote ahead of FDX earnings last week:

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.

I wrote that with the stock about 1% lower than were it is now.  Here is the stock’s chart in 2013, with the recent earnings day circled in red:

FDX daily chart in 2013, with 200 day ma in black, Courtesy of Bloomberg
FDX daily chart in 2013, with 200 day ma in black, Courtesy of Bloomberg

The stock opened strong and reversed on the day of earnings.  The following day it gapped down hard as two analysts downgraded the stock because of the weaker outlook.  It found support around 95, in the vicinity of the 200 day moving average.  However, the stock has now rallied back to near the 100 level.  

Economic conditions in Asia continue to weaken, and that has been a key earnings growth driver for FDX for the past few years.  Here is the CEO Fred Smith’s comments from the most recent quarter:

FedEx Ground posted another strong year and FedEx Freight margins continued to improve.  These positive developments did not fully offset tepid economic growth and customer preference for less costly international shipping services.  FedEx Express results improved in the fourth quarter, and while near-term challenges remain, we are confident we are positioning FedEx for profitable, long-term growth.

Those “near-term” challenges include what the company called a “highly uncertain” global economic environment, and potential further cost cuts in the Express business.  Not exactly encouraging business trends going forward.

We like fading the strength over the past week, targeting the 95 level of previous support.

TRADE: FDX ($99.37) Bought the August 100/95/90 Put Fly For 1.00

-Bought 1 August 100 Put for 3.55

-Sold 2 August 95 Puts at 1.60 or 3.20 total

-Bought 1 August 90 Put for .65

Break-Even on August Expiration: 

-Profits of up to 4.00 btwn 99 and 91,  max gain of 4.00 at 95.00

-Losses of up to 1.00 btwn 99  and 100 & btwn 90 and 91 max loss of 1.00 above 100 and below 90

Risk Chart:

[caption id="attachment_27675" align="aligncenter" width="628"]Screen Shot 2013-06-28 at 12.09.07 PM from ThinkorSwim[/caption]