New Trade FDX: Delivery Room

by Dan January 29, 2014 3:37 pm • Commentary

In the last few weeks, we have seen some fairly bad earnings disappointments from components of the Transport sector like KSU in rails, JBHT in trucking and UPS in air and ground.  FDX reported their fiscal Q2 results on December 18th, and are not scheduled to report again until mid March.

FDX is up 30% over the last year, even though earnings have only grown 6% on average over the past 2 years.  Investors have been buyers of FDX because of optimism about the firm’s restructuring efforts as a means of growing EPS quite quickly over the next couple years.  In fact, even though sales are only expected to grow 4-5% in 2014 and 2015, analysts are projecting 20% earnings growth.

Based on what we’ve seen so far from the transport sector, such expectations might be far too optimistic.  UPS cited weakness during the holiday season as a major factor in lowering guidance to start 2014, and we doubt that FDX escaped that weakness.

On the weekly chart, we can see the long-term breakout level of $120.  The stock was a rocket ship last year when it broke that level:  

[caption id="attachment_35572" align="alignnone" width="600"]FDX weekly, Courtesy of Bloomberg FDX weekly, Courtesy of Bloomberg[/caption]

Despite the stock’s year to date weakness of 8%, the recent break below its 50 day moving average could signal a possible re-test of the breakout level back in October.

The daily chart shows that the $130 short-term support level coincides with the rising 100 day moving average:

[caption id="attachment_35573" align="alignnone" width="600"]FDX daily, 50 day ma in pink, 100 day ma in green, 200 day ma in yellow, Courtesy of Bloomberg FDX daily, 50 day ma in pink, 100 day ma in green, 200 day ma in yellow, Courtesy of Bloomberg[/caption]

We’re playing for a short-term break of that level as investors readjust expectations for FDX ahead of the earnings event in March:

TRADE:  FDX ($132.16) Bought March 130/120/110 Put Fly for 1.95

– Bought 1 March 130 Put for 4.21

– Sold 2 March 120 Puts at 1.34 each (2.68 total)

– Bought 1 March 110 Put for .42

Break-evens on March expiration:

Profits: btwn 128.05 and 111.95 make up to 8.05, with max gain of 8.05 at 120

Losses: losses of up to 1.95 btwn 110 &  111.95 and btwn 128.05 & 130 with max loss of  1.05 below 110 or above 130.

Trade Rationale:

This trade is a cheaper way to participate in a potential break of $130, with the caveat that it will be less profitable than a normal put spread if that break comes sooner rather than later.  However, with important long-term support around $120, we like the wide range that the trade structure covers.