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

**OPTION TRADE: Buy the FDX Apr 2016 150.000 call (FDX160415C00150000) at approximately $6.70. Place a pre-determined sell at $12.00.

Note: No protective stop losses added -- but if you wish to do so make it $2.70.

by Ian Harvey

December 15, 2015

FedEx Corporation (NYSE: FDX), a provider of transportation, e commerce and business services under the FedEx brand, is scheduled to release its fiscal second-quarter results after the market close on December 16. Analysts forecast earnings of $2.53 per share on revenue of $12.47 billion.

The past six months have not been kind to FedEx, as the stock has fallen from a high around $185 to less than $143 as of Monday morning - down 14.4% on the year.

FedEx is coming off two straight earnings misses, which has kept the stock moving lower over the second half of the year. Despite missing analyst estimates, the company has managed to grow both earnings and revenue, as low oil prices continue to benefit the company's bottom line.

However, FedEx stock now looks quite attractive, particularly compared to its top rival United Parcel Service (NYSE:UPS).

FedEx Co. opened at 144.19 today. The company has a market cap of $40.74 billion and a PE ratio of 38.00. The company has a 50-day moving average price of $158.10 and a 200-day moving average price of $161.69. FedEx Co. has a 1-year low of $130.13 and a 1-year high of $185.19.

Analyst consensus coming into Wednesday's call is expecting $2.52 in earnings per share (EPS) on $12.45 billion in revenue for expected year-over-year growth of 18% and 4% respectively.

The fiscal 3rd quarter as it stands presently is expecting $2.41 and $12.48 billion in revenue for y/y growth of 20% and 7%.

Full-year '16 consensus is expecting EPS and revenue growth of 18% and 5% respectively.

From a bigger-picture perspective, FDX Express, the freight giant's primary segment at 54% of revenue and 48% of operating income has seen a sharp improvement in margins and operating income the last few quarters as the $1.6 billion "profit improvement" plan which was initiated in late 2014, seemed to really be a cost and headcount reduction plan at Express, which was badly needed given that Express volumes had been flat-to-lower for years.

Positive Moves

Earnings Growth Through Re-structuring -- A little more than three years ago, FedEx unveiled a big cost-cutting program designed to boost operating profit by $1.7 billion annually. Most of the savings were to come from right-sizing the FedEx Express division and modernizing its aircraft fleet.

This cost-cutting program started to impact FedEx's results during fiscal 2014. Since the second half of that year, earnings-per-share growth has accelerated. In fiscal 2015, adjusted earnings per share increased 27% to $8.95 from $7.05 a year earlier. The company also expects EPS of $10.40-$10.90 in fiscal 2016. The midpoint of that range would represent a 19% year-over-year increase.

Additional Growth Opportunities -- Longer-term, FedEx has lots of room to grow. In the U.S., it has been gaining market share from UPS in the ground shipping business for more than a decade. FedEx has been investing heavily to support further growth in this high-margin business as e-commerce shipment volumes rise.

FedEx is expanding its ground shipping capacity at a rapid clip.

FedEx's new facilities should enable more efficient sorting operations while increasing capacity. In future years, FedEx Ground won't need such massive investments to continue growing, meaning that it will start to generate very strong free cash flow.

Outside the U.S., FedEx's acquisition of Dutch rival TNT Express will significantly increase its market share within Europe compared to market leaders DHL and UPS. This proposed merger has cleared most regulatory hurdles and should close within the next few months. Combining the two delivery networks will unlock significant revenue and cost synergies.

Valuation Good -- Despite these ample earnings growth opportunities, FedEx stock is quite cheap, trading for about 13.4 times the midpoint of its fiscal 2016 EPS guidance range.

Several research firms have issued reports on FDX. Zacks Investment Research upgraded FedEx from a “sell” rating to a “hold” rating in a research report on Monday, November 23rd. Wolfe Research downgraded FedEx from an “outperform” rating to a “market perform” rating in a research report on Monday, November 30th. Citigroup Inc. restated a “buy” rating on shares of FedEx in a research report on Friday, August 14th. Cowen and Company restated an “outperform” rating and set a $190.00 target price on shares of FedEx in a research report on Wednesday, November 25th. Finally, Vetr downgraded FedEx from a “buy” rating to a “hold” rating and set a $167.67 target price on the stock. in a research report on Monday, November 16th.

Nine investment analysts have rated the stock with a hold rating, twelve have given a buy rating and one has issued a strong buy rating to the company’s stock. The company presently has a consensus rating of “Buy” and an average price target of $186.72.

Harvey’s Options Volatility Indicator

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

**OPTION TRADE: Buy the FDX Apr 2016 150.000 call (FDX160415C00150000) at approximately $6.70. Place a pre-determined sell at $12.00.

Note: No protective stop losses added -- but if you wish to do so make it $2.70.

”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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