Option Trade
FedEx Corporation (NYSE:FDX) Calls
 Tuesday, September 15, 2015

**OPTION TRADE: Buy the FDX Jan 2016 165.000 call (FDX160115C00165000) at approximately $3.20. Place a pre-determined sell at $6.40.

Note: No protective stop losses added as yet -- but if you wish to do so make it $1.30.

by Ian Harvey

September 15, 2015


FedEx Corporation (NYSE: FDX), a provider of transportation, e commerce and business services under the FedEx brand, is scheduled to report its fiscal first-quarter results before the market opens tomorrow, September 16th. The company is expected to report earnings of $2.45 per share on revenue of $12.34 billion. The stock is down 12.7% on the year.

Since the fourth-quarter fiscal 2015 (4QFY15) earnings release, the company stock has lost 17% compared to the 7% decline in S&P500 Index, due to some selling pressure due to the company's exposure in China and Japan, where economic conditions have weakened. While Asia could pose a problem for the company, low oil prices should help cushion the impact for now. Fuel costs represent a large portion of the company's overall costs, so earnings have been growing nicely while oil remains weak. Therefore, the belief is that at current price levels, a trading opportunity has been provided and earnings are likely to remain intact, despite the global economic turmoil.

Expectations of improved earnings come from the FedEx Profit Improvement Plan, the company’s own initiative to increase profits, aimed to increase profitability by $1.7 billion over the course of the next three years. Analysts have a greatly improved outlook towards FDX due to the fact that the company is not dependent on external factors for improvement, but is dependent on its own profit improvement plan initiative.

The company has been rated an average of 1.78 by 18 Wall Street Analysts with 11 analysts having added the shares in their list of strong buys.

12 Analyst have given the stock of FedEx Corporation a near short term price target of $194.67.

Technical Details

Shares of FedEx Corporation ended yesterday’s session in red amid volatile trading. The shares closed down 0.85 points or 0.56% at $150.23 with 2,594,990 shares getting traded. Post opening the session at $150.74, the shares hit an intraday low of $149.21 and an intraday high of $150.93 and the price vacillated in this range throughout the day.

The company has a market cap of $42,440 million and the number of outstanding shares has been calculated to be 282,501,000 shares.

The 52-week high of FedEx Corporation is $185.19 and the 52-week low is $130.17.


Previous Earnings

FedEx last posted its quarterly earnings data on Wednesday, June 17th. The shipping service provider reported $2.66 earnings per share for the quarter, missing the Zacks’ consensus estimate of $2.70 by $0.04. The firm earned $12.10 billion during the quarter, compared to analysts’ expectations of $12.31 billion. The firm’s quarterly revenue was up 2.3% on a year-over-year basis.

During the same quarter in the prior year, the firm posted $2.46 earnings per share. On average, analysts predict that FedEx will post $10.83 earnings per share for the current year.

Future Earnings

For fiscal 2016, FedEx has set a mixed bag of guidance. The company has projected adjusted earnings to be $10.60–$11.10 per share before any year-end mark-to-market pension accounting adjustments. The company expects to see better base pricing, volume growth, and benefits from its profit improvement program. This will offset any unfavorable change in fuel prices and anticipated increases in salary and benefits for the year.

FedEx expects to see a higher capex of about $4.6 billion due to higher investment in the continued expansion of the FedEx Ground networks. The effective tax rate for 2016 should be 36%–37% before any year-end pension adjustments and excluding any impact from the TNT acquisition.

Positive Factors

1. New and improved cost structure -- FedEx is in line to complete its profit improvement plan. It will help FedEx recognize its strengths. The plan will result in an improved cost structure. The company has successfully improved the operating margins from about 7.80% in 2013 to about 9% in 2015 without banking on revenue growth. It’s expected to hit the 10% mark in 2016 and beyond. This was expected by the company’s management. Its fleet restructuring and ground expansion initiatives are also on the right track. They will lead to lower costs and wider market reach in the future.

2. FedEx Ground is growing -- FedEx Ground has been growing consistently for the last decade with strong annual revenue growth. The prime driver behind this has been the company’s heavy investments in the business and the rise in the e-commerce industry. The company has also implemented the dimensional weight pricing method to improve efficiencies and margins.

3. New software will likely boost FedEx Ground -- FedEx Ground also consists of its SmartPost services. It gets help from the USPS (US Postal Service) for the last-mile delivery of residential packages. However, the company plans to launch a new software tool soon that will allow it to see if a FedEx Ground delivery is going to the same address as a SmartPost package. By doing so, the company can consolidate the two packages and have them delivered together by a FedEx Ground driver. This would allow the company to retain revenue from USPS on these deliveries without incurring any additional costs.

4. International expansion -- While Europe remains the key growth driver in the future with strong export volumes and the weaker euro, FedEx has also been investing in facilities and planes. It has acquired foreign companies to drive its growth in many other key markets like India, France, Hungary, the United Kingdom, Poland, Brazil, South Africa, and China. The company’s capex is expected to continue in this direction. These economies are expected to be the key consumption drivers in the future because they have the highest population growth.

5. Opting for biofuel -- FedEx has declared that it will purchase three million gallons of biofuel a year for eight years from Colorado-based Red Rocks Biofuel starting in 2017. This is in line with the United Nations’ decision to start regulating emissions from commercial aircraft. This has led companies like FedEx and Southwest Airlines (LUV) to opt for biofuel. Biofuel is made from dead trees, bark, branches, and leaves. The price for the new fuel is expected to be competitive with traditional fuel.

Analysts Opinions

FedEx was upgraded by Zacks from a “sell” rating to a “hold” rating in a research report issued to clients and investors yesterday. According to Zacks,

“FedEx Corporation performed disappointingly in the fourth quarter of fiscal 2015 delivering lower-than-expected revenues as well as earnings. Lower fuel surcharges and adverse foreign currency movements at the FedEx Express division hurt quarterly results. FedEx projects earnings per share for fiscal 2016 in the band of $10.60 to $11.10. We expect the company to achieve the guidance driven by a strong product portfolio. We are positive on FedEx’s decision to acquire Dutch firm, TNT Express, to strengthen its foothold in the European market.”

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

• Robert W. Baird cut their price objective on shares of FedEx from $200.00 to $195.00 in a research report last Friday.

• Citigroup Inc. set a $205.00 target price on shares of FedEx and gave the stock a “buy” rating in a report on Thursday, June 11th.

• Deutsche Bank restated a “buy” rating and set a $216.00 target price (up from $209.00) on shares of FedEx in a research report on Monday, June 15th.

• Finally, Oppenheimer set a $200.00 price target on shares of FedEx and gave the company a “buy” rating in a report on Thursday, June 18th.

Eight equities research analysts have rated the stock with a hold rating, ten have issued a buy rating and one has given a strong buy rating to the stock. FedEx currently has a consensus rating of “Buy” and a consensus target price of $199.95.

Harvey’s Options Volatility Indicator


While the dollar strength and the recent global concerns, with worries regarding China's economic slowdown at the forefront, will tend to hurt results in the first quarter, it is believed that strong performance at the FedEx Ground business will enable the company to outshine the reduced earnings per share estimate. The company expects rising e-commerce spending to generate strong business in ground shipments.

While international results are expected to be soft, domestic strength is likely to stand FedEx in good stead in the first quarter of fiscal 2016. The company’s focus on share buybacks and regular dividend payments to enhance shareholder value is also favorable, which shows that the company has healthy financial conditions and confidence in its business, going forward.

FedEx’s impending acquisition of TNT Express is also a positive. The deal, announced in April this year, is projected to close in the first half of calendar year 2016. The deal, once materialized, will significantly expand FedEx’s scale of operations, particularly in Europe. The expansion of its capabilities will enable FedEx to compete more effectively with rivals like United Parcel Service Inc. (UPS) that has a substantial European footprint.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the FDX Jan 2016 165.000 call (FDX160115C00165000) at approximately $3.20. Place a pre-determined sell at $6.40.

Note: No protective stop losses added as yet -- but if you wish to do so make it $1.30.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

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