MorningWord 12/21/16: FedEx Tracking Numbers

by Dan December 21, 2016 11:39 am • FREE ACCESS

Last night Fedex Corp (FDX) reported fQ2 results that disappointed on eps ($2.80 vs $2.91 expected) with weaker than expected operating margins (7.8% vs 9.1% expected). That was despite booking record sales at $14.93 billion up 19% year over year.  Shares of FDX are down 2.5% as I write, well below the implied move in the options market of 5% and below the 10 year average one day post earnings move of about 3.5%. That’s fairly astounding when you consider the stock was up 33% on the year heading into the print, and up 60% from its 52 week lows made in January.  I suspect when the calendar turns, and investors are more inclined to take profits and less worried about tax implications, companies that disappoint consensus expectations and offer weak guidance will be punished as opposed to the sort of rounding error we are seeing this morning in FDX.

To my eye, a pullback to prior support near $170 is possible. That was its breakout level to new highs after their Q1 results and is just above its 200 day moving average. But that would depend on further disappointing fundamental news and/or a broad market sell off in the new year:

FDX 1yr chart from Bloomberg

Before the earnings announcement we previewed the event and detailed a defined risk strategy to play for a pullback in shares following results into the new year. Here was the trade idea:

*FDX ($196) Buy the Jan 195/180/165 put fly for 3.00
  • Buy 1 Jan 195 put for 6.30
  • Sell 2 Jan 180 puts at 2.00 (4 total)
  • Buy 1 Jan 165 put for .70

With the stock down about 2 dollars from the entry, this trade is worth about 3.70. So it’s profitable but not a home-run as the move has under-performed the implied move, despite getting direction right. As far as trade management, the break-even on the trade is 192, so that’s an important area that we’d want to see the stock below to feel safe. Any move back to unchanged from where we put the trade on is a trouble area as 200 could serve as a magnet. So a stop above here around where the trade was put on makes sense. Below, 185 seems like a realistic area for the stock to go to if selling accelerated. At that spot this trade would be a nice winner and could either be taken of for a profit or left to collect decaying premium over the Holidays.