Event: FDX reports its fiscal Q4 earnings tomorrow morning prior to the open. The options market is implying about a 2.75% one day move, which is above the 4 qtr avg of about 1.75% and in line with the 8 qtr avg of about 2.75%.
Sentiment: Wall Street analysts are mixed on the stock, with 14 Buys, 15 Holds and 2 Sells, and the stock has an average 12 month price target of around $154, around 10% higher than the current level. Short interest is at 2% of the float, down from the start of the year (when it was closer to 5%). Despite the stock’s steady rally since mid-April, FDX is still down 2% so far year-to-date after a bad January.
Options Open Interest: Open interest heavily skewed towards puts, with a total call/put ratio of 0.50. Volumes over the past month have also been skewed to puts over calls, with a call/put ratio of about 0.8. Most of the put open interest is far downside put protection in Jan15. Outside of the Jan15 expiration puts, the October 140 puts and the October 145 calls are the only two lines with over 5k of open interest.
Price Action / Technicals: FDX has stalled over the past 6 months after breaking out to a new all-time high above $120 in October:[caption id="attachment_41835" align="alignnone" width="600"] FDX daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]
The $145 is the major resistance level that has held FDX in check throughout 2014. The stock made a minor new high in late May, only to fall back into the $130-$145 range that has encompassed most of the price action year-to-date. Both the 50 day moving average and the 200 day moving average are now rising, with the 200 day ma around $132.75, and the 50 day ma around $138.25.
Volatility: Implied volatility in FDX is quite low considering that earnings is tomorrow morning:
[caption id="attachment_41840" align="alignnone" width="600"] FDX 30 day implied volatility, Courtesy of Bloomberg[/caption]
The overall low level of volatility throughout the market is likely a big factor, but FDX has also not been a big mover on earnings over the last few quarters. The 4 quarter average move is only 1.75%, so options traders have not priced in a large move for this quarter.
Our View: FDX is expected to reap the benefits of its restructuring program over the next 4 quarters, as analysts have modeled in average year-over-year EPS growth of around 30% for that period. The rally in the stock at the end of last year was partly in anticipation of that growth. As a result, guidance from FDX management will be crucial this quarter.
Fundamentally, the stock looks fair as the stall over the past 6 months has allowed FDX to grow a bit into its extended valuation. Technically, the $145 level is crucial resistance that has held so far this year. Finally, options look quite cheap, indicating that options traders don’t expect an imminent breakout for now.