Shares of Fedex (FDX) have nearly doubled-up the performance of the S&P 500 (SPX) since the market lows in 2009, up about 400% vs the SPX up about 200%. What’s interesting about the recent price action in FDX is that the stock has not confirmed the new recent highs in the SPX, and has shown signs of waning momentum, with a series of lower highs and lower lows since late December:
The company is scheduled to report fiscal Q3 earnings on March 18th prior to the open, the same day that The Fed will issue their statement on a rate outlook. These two events combined during expiration week could make March options a bit more interesting for a stock that has moved on average only about 3.3% following the last 4 & 8 quarters.
The company reiterated their fiscal 2015 guidance on January 23rd, the morning that competitor UPS issued a profit warning and declined 9% from an all time high. So the likelihood of them missing the quarter just ended is not great, and the stock will trade off of forward guidance.
While the stock chart may look toppy, the stock’s valuation does not as earnings growth has gotten a material bump from a series of restructurings over the last few years coupled with aggressive share buybacks. The stock trades 20x expected fiscal 2015 earnings growth of 33%, and 16x expected fiscal 2016 earnings growth of 22%, which compares to UPS at 22x expected 2015 earnings growth of 9% and 18x 2016 of expected 11% growth. One big differential is the dividend yield of FDX of 45 bps compared to UPS at 2.86%. From a comparative standpoint FDX looks cheaper relative to growth at UPS, but it wouldn’t take much of downgraded forward guidance for FDX for the two to be more in line. FDX has slightly greater exposure to the strong dollar with about 35% of their sales outside the U.S. vs UPS which only has about 25%.
So if we were play “would you rather” I would probably be more inclined to take a shot on the long side with UPS than FDX, and also may even be inclined to take a shot on a long premium directional trade into FDX’s Q3 report in mid March.
With FDX around $177, the March 177.50 straddle is offered at about $7.25, if you owned that you would need a move above $184.75, or below $170.25 to break-even on March expiration, or about 4% in either direction. For traders who scalp stock vs the options that they own this could look attractive given 2 potentially volatile events two days prior to March expiration, one stock specific, and one market moving.
In the near term $170 (red line below) appears to be decent support, while $160 which also corresponds with the stock’s 200 day moving average should also serve as staunch longer term support:
[caption id="attachment_51341" align="aligncenter" width="600"]
FDX 6 month chart from Bloomberg[/caption]
We are not in the businesses of owning cheap vol in a non-directional basis, but this one looks reasonable, and adding up a bunch of inputs, the stock looks poised to move, we will keep our eyes on this one.