Trade Ideas June 30, 2020

Fedex (FDX) FQ4 Earnings Preview / Trade Ideas

by Dan

FedEx (FDX) will report its fiscal Q4 results today after the close. The options market is implying about a $10 (or about 6.5%) move in either direction tomorrow, which is basically inline with the average over the last four quarters.

Shares of FDX are down about 8.5% on the year, down about 16% from its 2020 high and down 50% from its all-time highs made in Jan 2018. The chart is nothing short of a trainwreck, quickly approaching the massive two-year downtrend just below $150:

 

FDX has obviously been adversely impacted by slower global trade, but their expected 2% sales decline in the fiscal year just ended and the 44% expected eps decline suggests that the company has been dealing with cost issues prior to the pandemic. Consensus estimates are calling for 9% eps growth in fy 2021 on a sales increase of 2%. The stock trades 16x 2020 and 14.6x expected 2021 eps, which trades cheap to competitor UPS that trades 20x expected 2020 eps (set to decline 28%) on flat sales (which seems optimistic) and 16x next year expected eps growth of 5%.

Wall Street analysts are fairly mixed on the stock with 14 Buy ratings, 15 Holds and 1 Sell with an average 12-month price target of ~$150.

Barron’s highlights the push-pull they have had to deal with during this unprecedented economic times that some might have thought would benefit companies such as FDX:

FedEx and other shippers have struggled to deal with the impact of coronavirus, which has hampered supply chains and caused companies to add shipping surcharges usually reserved for the holidays. Business shipping volumes are down as well.

Some might think that the surge in e-commerce would offset these headwinds, and to a degree they do, especially given how FedEx has become a more powerful player in this arena. But it is a competitive arena with numerous issues, including the perilous state of the U.S. Postal Service and increasing incursions by Amazon.com (AMZN).

FedEx has embraced technology to improve its business and company insiders have been bullish on the shares since the start of the crisis.

One of the Buy-rated analysts, Allison Landry from Credit Suisse, who has a $150 12-month target on the stock suggests in a note to clients last week that EPS declines are about to turn based on positive turn in margins due to their investments in business to consumer shipping that is exploding due to increased e-commerce adoption:

 

So what’s the trade? This is a tough one, the chart on a one year-basis looks poised to test the downtrend near $150, which is basically in-line with the implied move, but a break below the uptrend from the March lows and the stock is testing its May gap near $120:

 

If I were inclined to play for a re-test of the downtrend, essentially in-line with the implied move I would consider buying a call-calendar…for instance:

Bullish Trade Idea: FDX ($138.30) Buy July 2nd – August 150 call calendar for $4

-Sell to open 1 July 2nd (this Friday) 150 call at $1.10

-Buy to open 1 Aug 150 call for $5.10

Break-even on July 2nd expiration:

The ideal scenario is that the stock is near $150 on Friday’s close, at which point if below the short 150 July 2nd call will expire worthless or above can be covered for a small amount while the long Aug 150 call will have picked up deltas making it worth more than the $4 that it cost via the calendar. At this point, the idea would be to hold the Aug calls and play for a move back towards the March highs near $160.

The max risk of this trade idea is $4 which would be lost on a sharp move below current levels or above the 150 strike.

Or

If you are inclined to play for a miss and guide lower than put spreads targeting $120 to the downside make sense over the coming weeks, for instance:

Bearish Trade Idea: FDX ($138.30) Buy July 135 – 120 put spread for $3.50

-Buy to open 1 July 135 put for $4.95

-Sell to open 1 July 120 put at $1.45

Break-even on July expiration:

Profits of up to 11.50 between 131.50 and 120 with max gain of 11.50 below 120

Losses of up to 3.50 between 131.50 and 135 with max loss of 3.50 above 135

Rationale: this trade idea risk 2.5% of the stock price, and allows for gains of up to 8.5% of the stock price if it is down 13% in a little less than 3 weeks.

 

 

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