FedEx (FDX) will report its fiscal Q2 results today after the close. The options market is implying about an $11 move between now and Friday’s close, or about 6.5% move in either direction (most of which is for Wednesday’s post-earnings reaction).
Yesterday the WSJ reported: Amazon Blocks Sellers From Using FedEx Ground for Prime Shipments, Amazon cites a decline in FedEx performance heading into the final holiday push. This headline sent the shares down 3% in a straight line before the stock stabilized and closed down 1%.
Earlier this year Amazon stopped using FDX for deliveries of products sold by them, but the article suggests that 50% of the packages delivered in the U.S. are from third-party sellers. FDX suggested:
“the decision impacts a small number of shippers but “limits the options for those small businesses on some of the highest shipping days in history.” The carrier said it still expects to handle a record number of packages this holiday season. “The overall impact to our business is minuscule,” a FedEx spokeswoman said.”
While it is unquantifiable what this will mean for the current quarter, I suspect it drives home the point that AMZN is clearly accelerating their plans to take total control of their logistics.
Credit Suisse’s research analyst who rates FDX an Outperform with a $168 price target does not see a near term material negative impact:
From the stock’s 52 week lows made in early October, till yesterday’s highs, shares of FDX had rallied 22% on investor enthusiasm regarding a phase 1 trade deal. The stock is down about 20% from its 52-week highs made in April and down 40% from its all-time highs made in January 2018. $150 is clear support over the last year, but, the stock’s bounce above the downtrend is notable for those who think the stock is trying to bottom:
My Take into the Print: the stock is cheap at 13.5x expected 2020 EPS, but that EPS is expected to be down 20% year over year on sales that are expected to be flat year over year. SO the big question is whether guidance has been lowered enough where the company is able to beat a low bar and possibly raise for the current quarter.
So what’s the trade?
If I were inclined to play for a miss and a guide down I would use the Dec weeklies, and risk what I am willing to lose, targeting a 10% move lower to support at $150… for instance…
Bearish Trade Idea: FDX ($163.50) Buy Dec 162.50 – 150 put spread for $3.50
-Buy to open 1 Dec 162.50 put for $5
-Sell to open 1 Dec 150 put at $1.50
Break-even on Dec expiration:
Profits of up to 9 between 159 and 150 with max gain of 9 at 150 or lower
Losses of up to 3.50 between 159 and 162.50 with max loss of 3.50 at 162.50 or higher
Rationale: this trade idea risks 2.2% of the stock price with a break-even down about 2.75% and has a profit potential of 5.5% of the stock price if it is down 10% by Friday’s close.
If you are inclined to play for a beat and raise given low expectations and poor sentiment then consider a call calendar, selling short-dated out of the money calls and using the proceeds to help finance the purchase of longer-dated calls to play for a rally into the new year.
Bullish Trade Idea: FDX ($163.50) Buy Dec – Jan 175 call spread for $1.50
-Sell to open 1 Dec 175 call at $1.50
-Buy to open 1 Jan 175 call for $3
Break-even on Dec expiration:
This trade performs best with a move towards the 175 strike over the next two weeks into Dec expiration. If the stock is at or below 175 on Dec expiration the short 175 call will expire worthless and the trade will be left naked long the Jan 175 call. If the stock is close to 175 then the Jan 175 call will have appreciated as it will have picked up deltas. At that point, it might make sense to further reduce the premium at risk by selling a higher strike call in Jan turning the trade into a vertical call spread. The max risk f this trade is the $1.50 in premium paid, and would be at risk with a large move below the current level, or well above the 175 strike.
This trade idea risks 1% of the stock price.