Options Trade – FedEx Corporation (NYSE:FDX) Calls
Tuesday, September 16, 2014

**OPTIONS TRADE: Buy the FDX Jan 2015 160.000 call (FDX150117C00160000) at or under $4.30, good for the day. Place a protective stop limit at $1.70 and a pre-determined sell at $7.50.

by Ian Harvey

September 16, 2014

Introduction

FedEx Corporation (NYSE: FDX), the courier behemoth, reports its fiscal first-quarter numbers before the market opens on September 17. Analysts have forecast earnings of $1.94 per share, up from $1.53 during the same period last year. The stock is up 5.3% on the year.

Improvements to the global economy resulted in a strong close to FedEx's fiscal 2014, with fourth-quarter earnings coming in above the consensus estimate.

Despite this rapid rise, there is still more upside for FedEx stock in the years ahead. The FedEx Ground operation continues to gain market share, and the long-term growth of e-commerce will drive its continued growth. Meanwhile, FedEx's cost-cutting initiatives are finally hitting their stride, boosting profit margins. Lastly, as the global economy recovers, FedEx will be one of the prime beneficiaries.

Technical Details

FDX was recently trading at $150.76, down $4.55 from its 12-month high and $44.38 above its 12-month low. Technical indicators for FDX are neutral and the stock is in a weak upward trend. The stock has support above $147.90 and recent resistance below $154.25.

FedEx Corporation has the market capitalization of $43.53 billion and the company maintained EPS growth in prior 5 years of 85.20%. The return on assets (ROA) ratio of the company was 6.30% while its return on investment (ROI) ratio was 11.30%. Price to sales ratio was 0.96 while 79.90% of shares were owned by Institutional investors. The company earned $2.09 billion in prior 12 months on revenue of $45.57 billion.

Earnings

FedEx last released its earnings data on Wednesday, June 18th. The company reported $2.46 earnings per share for the quarter, beating the analysts’ consensus estimate of $2.36 by $0.10. The company had revenue of $11.80 billion for the quarter, compared to the consensus estimate of $11.66 billion.

During the same quarter last year, the company posted $2.13 earnings per share. FedEx’s revenue was up 3.5% compared to the same quarter last year. On average, analysts predict that FedEx will post $8.83 earnings per share for the current fiscal year.

The company also recently announced a quarterly dividend, which is scheduled for Wednesday, October 1st. Stockholders of record on Wednesday, September 10th will be paid a dividend of $0.20 per share. This represents a $0.80 annualized dividend and a dividend yield of 0.52%. The ex-dividend date is Monday, September 8th.

Moving Ahead

The Rise Of E-Commerce

E-commerce is growing at a tremendous rate, as consumers embrace the convenience and low prices of online retail. Obviously, e-commerce retailers need to get packages from their own warehouses to customers' doorsteps. FedEx Ground is one of the major avenues for doing so and has helped grow its revenue from $7.4 billion in its 2010 fiscal year to $11.6 billion in the recently ended 2014 fiscal year -- representing a 12% compound annual growth rate, making the Ground segment the fastest-growing area of FedEx.

It's also FedEx's most profitable division. Last year, FedEx Ground delivered a full-year operating margin of 16.8%, whereas the much larger Express division posted an operating margin of just 4.3%. The long-term growth of FedEx Ground, powered by e-commerce growth, will significantly enhance FedEx's profitability.

Cost-Cutting Hits Its Stride

Cost-cutting represents the most important driver of profit growth for FedEx Express. Between May 2013 and May 2014, FedEx implemented significant staffing reductions, primarily through an early retirement program. This reduced fixed costs at FedEx Express.

Going forward, a second cost-cutting program will be even more important. In 2012 and 2013, FedEx made a strategic decision to shrink the fleet of jets used in its Express operations. It is retiring dozens of older, fuel-guzzling aircraft -- primarily A310s and MD-10s -- ahead of schedule.

Global Economic Recovery

Boosting FedEx stock in the coming years is a return to faster global economic growth. One of the main factors that kept FedEx stock down during the past decade was the impact of the Great Recession and the slow pace of the subsequent recovery. FedEx aggravated its woes by reacting too slowly to changes in the economic environment. It delayed cutting costs, expecting a quick recovery.

FedEx has finally addressed its fixed cost structure. When the global economy recovers, FedEx will be well-positioned to leverage its fixed assets and thereby grow its profit margin.

Today, FedEx management believes the global economic recovery is strengthening. The company projects that global GDP growth will accelerate from 2.2% in 2013 to 2.6% in 2014 and 3.1% in 2015.

Express Looking Up

The Express segment's operating margin has been rising steadily in the past few quarters, which is very encouraging because it shows that the company's cost cutting plans are bearing fruit. Aided by lower pension costs, operating margin inched up to 6.8% in the fourth quarter from an adjusted 6.6% in the same period the previous year. Express revenues were also up 2% due to higher volume and yields.

International Growth

The courier behemoth is concentrating its investment, acquisitions, and specialized services in those regions where business is showing signs of growth. The European market has a huge potential for FedEx to tap into. In less than three years, FedEx Express has unveiled 100 stations, on-boarded 3,600 employees, and started intra-country services in 13 countries for increasing its footprint across the continent.

China's aging population has created a demand for health care products, and FedEx has wasted no time in improving its health care logistics capacities in the country to speed up services and meet increasing demand. It opened a new North Pacific regional hub in Osaka, Japan's Kansai International Airport in April 2014, which would function as a consolidation junction between northern Asia and the U.S.

With India emerging as a significant market for FedEx, it launched FedEx International Direct Priority Ocean services in the country. The service, more cost-effective than air shipping and swifter than ocean delivery, would transport freight from India to the U.S. on the sea route.

FedEx also completed the acquisition of Supaswift in South Africa and six other nations in the region in the fourth quarter. It's looking to make the most of global growth and is laying a lot of emphasis on increasing its presence worldwide.

Analysts Opinions

Two analysts have recently been quite positive in regard to FedEx’s continued stock price momentum:-

1. Scott Schneeberger – Oppenheimer

FedEx Corporation is benefiting from a rebounding economic picture and may beat Wall Street's consensus when it posts fiscal first-quarter results Wednesday, according to Scott Schneeberger, an analyst with Oppenheimer. He also boosted his estimates Monday for FedEx's first-quarter sales and earnings to above investors' average expectations, and said the company could also unveil an additional share buyback plan as part of its earnings release.

FedEx hit a rough patch earlier this year when it missed third-quarter earnings expectations and cut its outlook for the remainder of fiscal 2013.

But shares have rebounded 67 percent since hitting a trough in May.

Schneeberger thinks broadly higher sales in e-commerce channels as well as expanding U.S. manufacturing will help grow shipping volume at the company's ground and freight units, while lower jet fuel prices and internal improvements will lead to wider margins at the company's express operation.

Last year, Fedex cut about 3,600 workers through voluntary buyouts and as of May, the company employed 112,000 permanent and 50,000 part-time workers.

Savings from buyouts will be fully in effect for the first quarter, Schneeberger noted.

Wall Street expects the company will post first-quarter earnings of $1.96 cents a share on revenue of $11.48 billion. Schneeberger sees earnings higher by a penny a share, on revenue of $11.49 billion.

Schneeberger reiterated a Buy rating and raised his target on FedEx to $172 a share, from $168.

2. William Greene - Morgan Stanley

Morgan Stanley freight analyst William Greene previewed FedEx Corporation earnings on Friday. FedEx is set to release first quarter 2015 results September 17.

Greene discussed whether or not an earnings beat was already priced into the stock.

Analysts feel at a minimum, earnings should come in at consensus. Green offered four reasons why earnings may beat estimates:

• Beginning in 2014 Airfreight demand trends have increased internationally.
• FedEx has improved annual run-rate cost savings.
• In the previous may quarter, LTL (less-than-truckload) tonnage offered a big upside surprise.
• In most of the previous fiscal year fuel surcharges were negative; for first quarter 2015 analysts expect fuel surcharges to be about $0.20 positive.

Greene pointed out that historically, FedEx has traded at a premium P/E relative to the S&P 500. Currently, FedEx is trading trading inline with the 10-year average P/E; potentially offering upside with an earnings beat.

The company has been the subject of a number of research reports:-

• Analysts at Zacks reiterated a neutral rating on shares of FedEx in a research note on Friday, July 25th. They now have a $160.00 price target on the stock.

• Separately, analysts at Argus raised their price target on shares of FedEx from $162.00 to $169.00 in a research note on Thursday, July 10th. They now have a buy rating on the stock.

• Finally, analysts at Barclays raised their price target on shares of FedEx from $140.00 to $150.00 in a research note on Friday, June 20th. They now have an equal weight rating on the stock.

Nine analysts have rated the stock with a hold rating, nine have assigned a buy rating and two have issued a strong buy rating to the stock. FedEx currently has a consensus rating of Buy and a consensus target price of $151.60.

In Summary

• Earnings Per Share: The estimate is $1.94 (range $1.86 to $2.03). If the company produces a non-GAAP EPS, the estimate would be comparable to that measure.

• Revenues: Expectations are for an increase of 4.0% y/y to $11.47 bln (range $11.23 bln to $11.63 bln).

• Earnings Per Share Guidance for 2Q2015: The current estimate is $2.11 (range $1.94 to $2.29).

• Earnings Per Share Guidance for FY2015: Current guidance is $8.50 to $9.00.

• FedEx insiders show no activity over the last three months and sold 506,457 shares in the past year. The company in Q4 announced their largest stock buyback plan ever of 32 million shares and January's bond sale of $2 bln was to speed up stock buybacks. Warren Buffett bought nearly 9 million shares earlier this year.

• The company adopted dimensional weight pricing for all ground shipments as of Jan. 1, 2015. Previously that formula was limited to packages measuring three cubic feet or greater.

• FedEx P/E of 22.7 compares to an industry average of 24.7; P/B of 2.9 vs 5.9; P/S of 1.0 vs 1.2; P/CF of 11.1 vs 14.9. The stock basically went sideways from 2007 to mid-2013 allowing valuations to become relatively attractive which they still are.

• FedEx results could have a larger impact on other air delivery and freight service companies, such as UTi Worldwide (NASDAQ:UTIW) and United Parcel Service (NYSE:UPS).

• FedEx shares have a 1-day average price change on earnings of 3.42%. Options are pricing in an implied move of 2.95% off earnings.

• 09/04 Citigroup maintained a Buy rating and figures lower fuel costs will save $49 million in the third quarter and a lower headcount and pension costs will save an additional $129 million allowing the company to report an EPS closer to $2.10.

• 09/04 Memphis air cargo volume rose 5.7% YoY in July, according to Bloomberg.com.

• 09/03 FedEx raised their fuel surcharge by 3% in June, so falling crude oil prices could provide a tailwind, according to a post by Benzinga.com.

Conclusion

FedEx is viewed as a bellwether stock for the overall economy, and as the economy has improved in recent years, FDX stock has been enjoying strong gains as well. After rising over 50% in 2013, the stock has been lackluster in 2014, but has still managed to beat the overall market, and is currently just shy of its all-time high.

FedEx expects EPS to reach $8.50-$9 in its current fiscal year. That is equivalent to a 26%-33% year-over-year gain. FedEx's ongoing aircraft fleet restructuring and the growth of FedEx Ground should drive strong EPS growth for a few more years, too.

Longer term, FedEx is likely to be one of the biggest beneficiaries of a resurgence in global economic growth (whenever that occurs). As a result, FedEx stock should continue to rise despite surging about 70% in the last two years.

Expect the company's first-quarter results to reflect improvements in the overall economy, with earnings being strong enough to keep the stock moving higher.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the FDX Jan 2015 160.000 call (FDX150117C00160000) at or under $4.30, good for the day. Place a protective stop limit at $1.70 and a pre-determined sell at $7.50.



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