Option Trade
FedEx Corporation (NYSE:FDX) Calls
Sunday, June 14, 2015

**OPTION TRADE: Buy the FDX Oct 2015 190.000 call (FDX151016C00190000) at or under $5.00. Place a protective stop loss at $2.00, and a pre-determined sell at $10.00.

by Ian Harvey

June 14, 2015

Introduction

FedEx Corporation (NYSE: FDX), which provides a portfolio of transportation, e-commerce and business services under the FedEx brand, will post its fiscal fourth-quarter results before the market open on June 17th. The company is expected to post quarterly earnings of $2.70 per share, up from $2.46 during the same period last year. The stock is up 5.8% on the year.

FedEx has been trending sharply higher over the last year. With fuel costs accounting for a large amount of the company's total overhead, lower oil prices have helped the company grow earnings nicely over the last year. Last quarter the company reported year over year earnings growth of 63%.

FedEx Corporation’s stock has been surging high ever since it managed to acquire a “Buy” rating from the Swiss financial company, Credit Suisse. Allison M. Landry of Credit Suisse has upped the target price of the credit company from a previous $198/ share to a hefty $206/ share. Landry has also raised the predicted figures of earnings per share from $10.80 to $10.89 for the upcoming fiscal year of 2016.

Technical Details

FDX was closed Friday trading at $183.65. FedEx has a 52 week low of $138.30 and a 52 week high of $185.19. The stock’s 50-day moving average is $183.29 and its 200-day moving average is $183.41. The company has a market cap of $52.11 billion and a P/E ratio of 21.07.

Technical indicators for FDX are bullish and the stock is in a strong upward trend.

Earnings

Previous Earnings

FedEx last issued its quarterly earnings data on Wednesday, March 18th. The shipping service provider reported $2.01 earnings per share (EPS) for the quarter, beating the consensus estimate of $1.88 by $0.13. The company had revenue of $11.70 billion for the quarter, compared to the consensus estimate of $11.80 billion.

During the same quarter in the previous year, the company posted $1.23 earnings per share. The company’s revenue for the quarter was up 3.5% on a year-over-year basis. On average, analysts predict that FedEx Co. will post $8.94 earnings per share for the current fiscal year.

Future Earnings

Analysts are predicting FedEx will report fourth quarter fiscal 2015 (4QFY15) revenues of $12.3 billion, showing YoY growth of 3.90%. They are forecasting a 1.70% YoY growth in UPS’ revenues for the second quarter of fiscal 2015 (2QFY15), of $14.51 billion. Similarly, they are predicting greater FedEx bottom line growth than UPS. 4QFY15 EPS for FedEx is expected to show YoY growth of 9.10%, compared to a 5% YoY increase expected for UPS’ 2QFY15 EPS.

In its latest earnings release, FedEx says, it expects an EPS of between $8.80 and $8.95 during fiscal year 2015, compared to $6.75 reported for fiscal 2014 (FY14). Analysts are anticipating a company FY15 EPS of $8.94, showing a YoY increase of 32.40%. UPS expects to report a FY15 EPS of between $5.05 and $5.30, compared to $4.75 reported in the earlier year. Analysts expect the company to report an EPS of $5.20 during FY15, 9.40% higher than that reported in the earlier year. Analysts foresee full year revenues at FedEx to show a YoY increase of 4.70% during FY15, compared to a 2.60% YoY growth expected in UPS’ top line.

FedEx stock is currently trading at a discount when compared to both the industry and stock of rival UPS. It is now trading at 16.39 times its projected 12-month earnings, representing a 14.81% discount to the industry (trading at a 12-month P/E of 19.24x), and an 11.07% discount to UPS (trading at a 12-month P/E of 18.43x).

Why FedEx?

FedEx is now on the right track after its procurement of TNT Express NV- ADR (OTCMKTS:TNTEY), which would allow the company to spread its business in Europe. Analysts are convinced that FedEx stocks would amplify to $195.20 within the next few months.

FedEx is expected to show improved growth in the results the second quarter of fiscal 2015. It has shown far better performance than its competitor United Parcel Service, Inc (NYSE:UPS). The stocks of FedEx have swollen up to 6.48% while that of UPS’s plummeted to 9.15% on year to date basis.

FedEx announced earlier this month that it will be speeding up the retirement of its aircraft fleet, which analysts expect to drive future margins. As part of its fleet modernization and capacity management program, it will be retiring 15 aircraft and 21 related engines.

Among the 15 aircraft are seven MD11s, three A300s, four A310s and one MD10. This resulted in a cost to the company of $246 million during May this year. The company says it is looking to upgrade its fleet by adding Boeing’s 767. Each additional 767 adds $10 million to the company’s bottom line, due to a 30% increase in fuel efficiency and a 20% reduction in unit costs.

Analysts Opinions

RBC Capital lifted their price objective on shares of FedEx from $180.00 to $195.00 in a research note issued last Thursday. The firm currently has a “sector perform” rating on the shipping service provider’s stock. RBC Capital’s price objective points to a potential upside of 6.95% from the stocks previous close.

As well, FedEx‘s stock had its “buy” rating reaffirmed by stock analysts at Credit Suisse in a report issued last Thursday. They currently have a $206.00 target price on the shipping service provider’s stock. Credit Suisse’s price objective would suggest a potential upside of 12.99% from the stock’s previous close.

Also, FedEx was upgraded by Zacks from a “hold” rating to a “buy” rating in a research report issued to clients and investors last Wednesday. The firm currently has a $202.00 price target on the shipping service provider’s stock. Zacks‘s price objective indicates a potential upside of approximately 12% from the company’s current price.

According to Zacks, “FedEx Corporation delivered mixed results in the third quarter of fiscal 2015 reporting higher-than expected-earnings but lower-than-expected revenues. Quarterly adjusted earnings of $2.01 per share handily beat the Zacks Consensus Estimate of $1.88 on the back of higher package volumes and yields. The company now expects fiscal 2015 earnings per share in the band of $8.80 to $8.95. We are positive on FedEx’s decision to acquire Dutch firm TNT Express to strengthen its foothold in the European market. Further, the company’s efforts to boost shareholder’s return through share repurchases and dividends are also encouraging. However, competitive threats, legal hassles, unionized workforce and pension headwinds could limit the upside potential of the stock, going ahead.”

FedEx has also earned a “BBB+” credit rating from analysts at Morningstar. The research firm’s “BBB+” rating indicates that the company is a moderate default risk. They also gave their stock a three star rating.

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

• Analysts at Oppenheimer reiterated an “outperform” rating on shares of FedEx in a research note last Tuesday.

• Analysts at Nomura reiterated a “neutral” rating and set a $190.00 price target on shares of FedEx in a research note on Thursday, May 28th.

• Analysts at Barclays reiterated an “equal weight” rating and set a $180.00 price target on shares of FedEx in a research note on Saturday, May 23rd.

• Finally, analysts at Deutsche Bank reiterated a “buy” rating and set a $209.00 price target on shares of FedEx in a research note on Wednesday, April 8th.

Five research analysts have rated the stock with a hold rating, eleven have given a buy rating and one has issued a strong buy rating to the stock. FedEx has a consensus rating of “Buy” and a consensus price target of $196.20.

Conclusion

FedEx’s investment in their operations is expected to drive growth in their top and bottom line for the foreseeable future. With the addition of TNT Express’ network in Europe, FedEx will be better positioned to compete with UPS and Deutsche Post, further driving growth.

If the company hits the consensus for Q4, it would mark year over year earnings growth of 9.8%. Oil prices have started to firm, but recent gains should not have an impact on the company's fiscal fourth-quarter. Expect strong results, and for FDX shares to climb to a new high following the report.

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


**OPTION TRADE: Buy the FDX Oct 2015 190.000 call (FDX151016C00190000) at or under $5.00. Place a protective stop loss at $2.00, and a pre-determined sell at $10.00.



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