Event: Fedex (FDX) reports fiscal Q4 results Wednesday before the open, the options market is implying about a 3.25% one day move which is a tad lower than the 4 qtr avg of about 3.6%, but higher than the 8 qtr avg of 2.65%.
Price Action / Technicals: FDX is one of the best performing stocks in the transport sector, up 5.5% ytd, outperforming the S&P 500 which is only up 1.3% ytd.
The two year chart below shows the stock’s steady uptrend since the summer of 2013, nearly doubling from the 2013 lows:[caption id="attachment_54476" align="aligncenter" width="600"] FDX 2yr chart from Bloomberg[/caption]
FDX is the single largest holding in the IYT (the iShares Transportation etf) at a weighting of 13.5%, followed by rival UPS at 7.5% and then three rail companies that equal about 20%. Despite FDX’s out-performance to the broad market, the IYT is down 7.5% on the year, and down about 105 from the all time highs achieved in late November:[caption id="attachment_54477" align="aligncenter" width="600"] IYT 1yr chart from Bloomberg[/caption]
There are a couple of things I find interesting about this chart. The first is applying the Dow Theory, which basically suggests that new highs in either the Dow Jones Industrials needs to be confirmed by the Dow Jones Transports, or vice versa. The chart above shows the series of lower highs and lower lows, and as you know the Dow Jones Industrials is just 3% from its all time highs made last month, and since the IYT topped out, the Industrial average has made three new highs. And the second is that little matter of the death cross (the 50 day moving average in purple crossing below the 200 day moving average in yellow).
Valuation: If we were playing would you rather with FDX and UPS, the price action of the two stocks over the last year (UPS flat vs FDX up 30%) is reflective of the far more attractive valuation relative to growth for FDX over UPS. FDX trades a little less than 17x expected 2016 earnings growth of about 20%, while UPS trades about 17x expected earnings growth of only 11%. Both companies buy back shares aggressively but FDX’s dividend yield of 55 bps vs UPS at 2.9% sticks out like a sore thumb.
My View: I am generally unexcited about playing FDX for a breakout to new highs as I suspect the weakness across the Transports makes FDX a bit of an outlier. And their 28% revenue exposure outside the U.S., despite the slight decline in the Dollar over the last couple months, could be offset by the rise during the same period in their largest input cost, fuel. I am inclined to fade the move to the upside, and lean slightly lower. I would also add that with an agreement on Greece’s debt and the potential for a flare up with tensions in Ukraine with Russia this summer, Europe, despite recent green shoots, could serve as a headwind.
I will consider trades prior to Wednesday morning’s results.