Fedex (FDX) Fiscal Q1 Preview & Trade Ideas

by Dan September 20, 2016 12:57 pm • Trade Ideas

Event: FedEx (FDX) reports their fiscal Q1 results tonight after the close. The options market is implying nearly a 5% post earnings move tomorrow in either direction, which is shy of the 4 qtr one day average move of about 5.3%, and rich to the 10 year average of about 3.3%.

Price Action / Technicals: FDX is up 10% on the year, doubling the performance of the S&P 500 (SPX), and up nearly 40% from its 52 week lows made in February, which marked a peak to trough decline of 35% from its then 52 week and all time highs made in late June 2015.

Since the stock’s 12% one day rally in late March following better than expected fQ3 results, the stock has been range bound for 6 months between $150 and $170, spending all but 3 trading sessions below $150:

[caption id="attachment_66448" align="aligncenter" width="600"]FDX 1yr chart from Bloomberg FDX 1yr chart from Bloomberg[/caption]

The stock’s consolidation and relative out-performance is notable, but I would add that the uptrend, which the stock bounced off last week is fairly important near term support, with little support for another $10.

Sentiment: Wall Street analysts are fairly bullish on the stock with 17 Buy ratings, 8 Holds and no Sells with an average 12 month price target at $181, 10% higher than current levels, just below the 52 week highs. just below the all time highs.

Valuation: By most standards, relative to expected growth, FDX is a cheap stock, trading below a market multiple at 13.7x expected fiscal 2017 eps growth of 10% with sales expected to rise 10%.  Oddly, UPS trades 18.5x expected 2016 eps growth of 7% (17.5x 2017 expected growth of 6%) on expected sales growth of 4 & 5% respectively.

Expectations: This morning the WSJ detailed FDX’s plan to match UPS’s prior shipping rate increases:

FedEx Corp. said its will raise shipping rates starting next year, including an average increase of 3.9% at its air-shipping Express division and 4.9% for its ground and home-delivery services.

The shipping giant’s plan comes after rival United Parcel Service Inc. recently unveiled an average rate increase of 4.9% to help pay for system upgrades and expansion. Higher rates at UPS’s freight division were set to take effect Monday, with increases across its other services targeted for Dec. 26.

Also in focus will be any clarity around their recently closed acquisition of ground carrier TNT Express, per WSJ:

Express accounts for more than half of FedEx’s overall revenue. It will get a boost from the $4.8 billion acquisition of TNT Express NV, the largest deal in its history, completed earlier this year. TNT gives FedEx a stronger footprint in Europe. Analysts at Cowen & Co. forecast TNT will initially dilute earnings. The company expects it to be accretive by fiscal 2018.

Express has shown promise of late. Its international airfreight generates revenue of $54.16 per package, otherwise known as “yield.” That is the most among all of FedEx’s segments and triple what a domestic package yields. Volumes also have increased.

My View: Inline results and guidance and the stock is likely up towards resistance at $170, which is also inline with the implied move.  On the downside, the risk is likely greater than the $6.50 implied earnings move as the stock has rallied 3.5%, or about $5 since Friday’s open.

Trade Ideas:

Bullish/stock alternative:

FDX ($163.65) Buy Sept23rd weekly Call Butterfly 162.50 / 170 / 177.50 for $2
  • Buy 1 Sept23rd 162.50 call for 4.10
  • Sell 2 Sept23rd 170 calls at 1.17 each or 2.34 combined
  • Buy 1 Sept23rd 177.50 call for 24 cents

Break-Even on Sept23rd weekly expiration:

Profits: of up to 5.50 between 164.50 and 175.50 with max gain of 5.50 at 170

Losses: up to 2 between 162.50 and 164.50 & between 175.50 and 177.50, with max loss of 2 below 162.50 and above 177.50

Rationale: This trade idea targets the implied move to the upside which also happens to be resistance. It limits risk to $2, which is much less than the implied move. Its break-even at 164.50 is just slightly higher than where the stock is now. It does not do as great on a big move to the upside as profits trail off above 170, so this is not a trade for those looking for fireworks to the upside.


Hedge against 100 shares of long stock:

FDX ($163.65) Buy the Nov 180 – 160/145 put spread collar for $2
  • Sell 1 Nov 180 call at 1.00
  • Buy 1 Nov 160 put for 4.25
  • Sell 1 Nov 145 put at 1.25

Break-evens on Nov expiration:

Profits: of stock between current levels and 180, profits capped above 180, less the $2 paid for the hedge.

Losses: of stock down to 158 (long put strike less the premium paid for hedge), protection between 158 and 145, none below but have mitigated $13 of risk.

Rationale – This trade protects the stock from 158 to 145 out to Nov expiration, through the election. It sells an upside call to help finance that hedge but the call strike is just below the previous high. This is for those that would love to stay long the stock for a new high while locking in some protection below.