Name That Trade – $FDX: Nice Package

by Dan March 17, 2015 2:00 pm • Commentary

A few weeks ago I took a look at FDX with an eye towards tomorrow morning’s fiscal Q3 report (below). I was particularly focused on the price of FDX options, while also taking a peak at the technical consolidation.   At the time of the previous post the stock was approaching the upper end of the 4 month range, subsequently failed but has since made it all the way back:

FDX 6 month chart from Bloomberg
FDX 6 month chart from Bloomberg

The range is pretty clear between $170 and $180.

The options market is implying a one day move of about 4.25% which is a bit higher than the average of only about 3.3% following the last 4 & 8 quarters.  It is important to note that the stock closed down 3.7% on December 18th after issuing disappointing Q2 results, but was down 6% (circled above) on its lows that morning before recovering. 

The quarter could be in the bag so to speak as FDX 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.  Since Jan 23rd the DXY (the Dollar Index) is up a little more than 5% and since FDX gets about one third of their sales outside the U.S.,  this could obviously be a headwind.

And fuel costs. They are obviously a massive input cost but in the last quarter, those lower gas prices weren’t enough to offset the disruption from the West Coast port slowdown, from the AP:

FedEx has been saving money from cheaper fuel, but company executives told analysts that fuel delivered only a slight benefit to operating income in the quarter. The company buys its fuel based on contracts tied to prices set during the preceding week or month, and those prices did not decline as quickly as daily rates, which fell almost 30 percent from August to November. The company said it was working to adjust more quickly to those daily market rates.

MY VIEW: I would be surprised if the stock was right here at this time tomorrow.  I could see an epic breakout to new all time highs on a beat and raise, something of the early February Disney variety, or I could see a re-test of $170 with an eventual test of the stock’s 200 day moving average (in yellow in the chartr above), very near the December lows. So are there good structures to express these views?

Hypothetical Trade Ideas:

Breakout: For a breakout one would want to reduce their premium at risk by going out of the money. And because implied volatility is slightly higher than normal into the print, one would probably want to further reduce the cost with a call fly structure rather than a call spread. The April 180/190/200 call fly is abut 2.15 is probably the best way to play for a breakout. The breakeven on this structure is 182.15 on April expiration and has profit potential of up to $7.85 if the stock is at $190 on April expiration. Above that profits start to trail off but that’s a big move so the chances are unlikely.

Re-Test of $170: Calendars of all stripes look great in FDX into the print. To play for a move back towards $170, one can sell the March 170 puts and buy the April 170 puts for about 1.10. This is selling 64 vol in March and buying 25 vol in April. Basically any move lower on earnings and this structure is a winner with the max profits at the $170 level this Friday. As a rule of thumb calendars where you can sell the front month for more than double the vol of the month you buy have a very wide range of profitability. April vol will get hit after the print though, by at least 25% so this is not a risk-less trade by any means if the stock is slightly higher.



Original Post Feb 25th, 2015:  Name That Trade – And You Want a $FDX Throw Down

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:

FDX 1yr chart from Bloomberg
FDX 1yr chart from Bloomberg

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:

FDX 6 month chart from Bloomberg
FDX 6 month chart from Bloomberg

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.