Event: FDX reports its fiscal Q3 earnings tomorrow morning prior to the open. The options market is implying about a 3.25% one day move, which is right around both the 4 qtr avg of about 3.35% and the 8 qtr avg of about 3%.
Sentiment: Wall Street analysts are mixed on the stock, with 16 Buys, 14 Holds and 2 Sells, though the stock has an average 12 month price target of around $155.84, more than 10% higher than the current level. Short interest is at 3% of the float, near the highest level of the past 5 years. FDX is down 4% year-to-date, but up 30% over the past year.
Options Open Interest: Open interest heavily skewed towards puts, with a total call/put ratio of 0.65. However, a portion of the open interest in downside puts is way out-of-the-money puts that were put on a long time ago and which are now not in play. The one month average volume has still favored puts though, with a one month call/put ratio around 0.65 as well. The Apr19th 140 calls and the Apr19th 140 puts are the highest open interest calls and puts respectively, at around 6k.
Price Action / Technicals: FDX broke out above its prior all-time high around $120 in October, and has not looked back since:[caption id="attachment_37676" align="alignnone" width="600"] FDX 10 year monthly chart, Courtesy of Bloomberg[/caption]
That long-term breakout led to a move all the way to $144.39, which was the intraday high on the first trading day of 2014. Since then, FDX has struggled, though it has developed short-term support around $130. The stock’s 50 day moving average around $136 is in the middle of the 5 month range:[caption id="attachment_37677" align="alignnone" width="600"] FDX daily, 50 day ma in pink, Courtesy of Bloomberg[/caption]
The all-time high near $145 is resistance, while the $130 level is support. We still own our trade structure from late January, but it’s not worth much at this point, so a lottery ticket into the event.
Fundamentals: A big reason for our bearish bias on FDX in late January was a result of the slew of weak earnings reports from transports related names, including UPS, over the holiday season. We wrote in that post:
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.
Since then, nothing new has come out about FDX, though the shares have gradually rallied with the market. The stock is trading at the high end of both its historical P/E and historical P/S ratios. Here is the P/S ratio over the last 10 years (the P/E chart is a bit skewed by 2008/2009, but at 21x, that’s near the high end of the 10-25 range for most of the past decade):[caption id="attachment_37678" align="alignnone" width="600"] FDX P/S ratio, Courtesy of Bloomberg[/caption]
In other words, FDX probably does not have much room left for multiple expansion, so meeting or beating the lofty expectations for 2014 is going to be key. That places more importance than usual on the results over the next few quarters.
Volatility: Considering that FDX has earnings tomorrow morning, implied volatility in the options is quite low compared to the level prior to the past few earnings reports:[caption id="attachment_37679" align="alignnone" width="600"] 30 day implied volatility in FDX, Courtesy of LiveVolPro[/caption]
FDX realized volatility has fallen quite a bit over the past few weeks (30 day realized volatility is down to 16, its lowest levee since early 2013), which is a big reason for the fall in implied volatility. Options traders are clearly not expecting a break of the $130-$145 range.
Our View: Fundamentally, we are still bearish on FDX, but the stock’s price action indicates a neutral technical situation. Perhaps FDX can buck the trend of weak earnings reports among transports-related stocks, though we view expectations as already quite high based on FDX’s P/E and P/S multiples.
In any case, we still own the out-of-the-money lotto ticket that expires on Friday, but don’t plan any new position in FDX for now.