$FDX – Catchin’ keys from across seas

by Dan March 15, 2016 2:42 pm • Commentary• Trade Ideas

Event: FedEx (FDX) reports their fiscal Q3 results tomorrow after the close. The options market is implying about a 4% post earnings move. With the stock around $142, the March 18th straddle (call premium + the put premium) is offered at about $5.75, if you bought that, and thus the implied earnings move you would need a move above $147.75 or below $136.25 to make money.  The average post earnings one day move over the last 4 qtrs has only been about 2.3%, and the 10 year average one day move has been about 3.3%.  

Price Action / Technicals: FDX is down 4.5% in 2016, and is down 23% from its 52 week and all time high made in mid 2015.  Since its June highs, FDX has been in a fairly well defined downtrend, making a series of lower highs and lower lows:

[caption id="attachment_62196" align="aligncenter" width="600"]FDX 1yr chart from Bloomberg FDX 2yr chart from Bloomberg[/caption]

Taking a longer term view, the stock has re-taken the uptrend that had been in place since its lows in early 2009, with apparent technical support down near the 52 week lows made in January at $120.

[caption id="attachment_62197" align="aligncenter" width="600"]FDX 8 yr chart from Bloomberg FDX 8 yr chart from Bloomberg[/caption]

Sentiment: Wall Street analysts are fairly mixed on the stock with 16 Buy ratings, 12 Holds and no Sells with an average 12 month price target at $172, 20% higher than current levels, just below the 52 week highs.

Valuation: By most standards, relative to expected growth, FDX is a cheap stock, trading below its expected earnings growth rate and below a market multiple, and far cheaper than peer UPS.  FDX trades 13.5x expected fiscal 2016 eps growth of about 18%, 12x expected f2017 eps growth of 13%. The forward 12 month P/E ratio for the S&P 500 (SPX) is about 16.  UPS trades 17.5x expected 2016 eps growth of 6%, and 16.25x expected 2017 eps growth of 8%.

My View: The stock is cheap on current estimates (barring a guide down). The flag the stock formed over the last couple weeks could easily pop higher to the downtrend near $150, but at that point I would expect the stock to face resistance and probably fail:

[caption id="attachment_62206" align="aligncenter" width="600"]FDX 1yr chart from Bloomberg FDX 1yr chart from Bloomberg[/caption]

If the company were to miss and guide lower, possibly the result of weak global demand and the adverse affect of dollar strength on the 35% of sales that come from outside the U.S. then the stock would very likely be testing $130 in the coming days.

One possible long term risk to the stock is Amazon’s plans to develop their own package delivery system. But analysts think that is still a few years away and FDX can continue to count on Amazon for the time being.  As Citigroup’s Mark May said in a note to clients yesterday, via Barron’s:

Amazon Still Needs FedEx & UPS: Our analysis finds that FedEx and UPS delivered ~28% of Amazon’s U.S. packages in 2015 (likely skewed toward Prime), Amazon currently makes up ~5% of domestic volume at each carrier and ~15% of FedEx and UPS’ incremental domestic volume growth in 2015. While Amazon is actively diversifying its last mile fulfillment, its rapid growth and FedEx/UPS’ delivery scale suggests these interdependent partnerships will remain for the foreseeable future (e.g., we estimate that 23% of Amazon’s volume in the U.S. will go through these two partners in 2016, with volume growth of ~10% comparable to 2015)…

We estimate Amazon contributes 2-3% of FedEx and UPS’ EPS, though it is their largest e-commerce customer and an important source of growth

But the longer term risk could be one of the main reasons FDX continues to trade below a market multiple, as investors may start to discount mid teens eps growth rates on low to mid single digits sales growth.

We will take a closer look tomorrow and identify some attractive pre-earnings trades depending on one’s current positioning or directional inclination.