Option Trade
FedEx Corporation (NYSE:FDX) Calls
Monday, September 18, 2017

** OPTION TRADE: Buy the FDX JAN 19 2018 220.000 CALL at approximately $7.80. Place a pre-determined sell at $15.00.

Note: No protective stop losses added -- but if you wish to do so make it $3.20.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

by Ian Harvey   

FedEx Corporation (NYSE:FDX) - a leading player in the field of global express delivery services - is expected to release its fiscal first-quarter numbers on September 19. The company will report its quarterly results after the market close, with the consensus calling for earnings of $3.17 per share, up from $2.90 during the same period last year; on revenue of $15.36 billion but the Earnings Whisper number is higher at $3.20 per share.

Consensus estimates are for year-over-year earnings growth of 9.31% with revenue increasing by 4.75%. Short interest has decreased by 5.6% since the company's last earnings release while the stock has drifted higher by 3.3% from its open following the earnings release to be 8.1% above its 200 day moving average of $198.65. Overall earnings estimates have been revised higher since the company's last earnings release.

FedEx stock is near record highs heading into this week's earning release. Investors have grown more confident about the package delivery giant's business lately, especially after the company trounced earnings expectations three months ago. Factors pushing results higher right now include rising volumes, increased prices, and the integration of the TNT European delivery segment into the business.

The stock is up 14.0% on the year.

FedEx Corporation has a market cap of $57.63 billion, a P/E ratio of 19.41 and a beta of 1.28. FedEx Corporation has a 12 month low of $159.55 and a 12 month high of $219.99. The firm has a 50-day moving average of $209.74 and a 200 day moving average of $201.96.

Influencing Factors

Fundamentally speaking, FedEx is cheap versus its main competitor United Parcel Service, Inc. (NYSE: UPS ). FDX stock's price-to-earnings ratio is almost 50% lower than that of UPS. But with the technical potential in FDX, investors will play catch up soon enough.

Not only is it relatively cheap, FDX has value from a price-to-book perspective as well. Another attractive metric is price-to-sales, which is below one. So the whole fundamental picture is conducive to an upside burst, and therein sits our opportunity.

Technically speaking the FedEx stock price action is constructive on the daily, weekly and monthly charts. All three time-frames show it's trading at the upper end of range limits, but they also show bullish patterns in the making.

As well, the technical breakout in the transports ETF iShares Dow Jones Transport Avg. (ETF) (BATS: IYT) supports the breakout idea from its own bullish patterns.

FedEx must spend aggressively to support the added volume that comes with economic growth and spiking demand for e-commerce deliveries. In fact, the company is targeting $5.9 billion of capital spending on its network this fiscal year, up from $5.1 billion last year. Management considers these modernization projects well worth the cash outlay, and investors are likely to agree given FedEx's optimistic outlook. Executives' latest forecast calls for earnings of between $12.45 per share and $13.25 per share this year -- compared to $11.07 in fiscal 2017.

Wall Street is bullish on the top-line growth of LTL (less-than-truckload) players. According to David Ross, a Stifel analyst, the “key to 2018 growth is an improving manufacturing sector and reduced truckload supply, which might be sufficient enough to cause lighter-weight TL shipments to flow back into LTL networks.”

E-commerce and global trade growth will have a strong bearing on FedEx’s estimated revenue growth. A new e-marketer report estimates that total retail sales worldwide will top $27.0 trillion in 2020. The same agency expects a consistent double-digit growth in retail e-commerce revenues until 2020 for North America.

Thomson Reuters’ survey of FedEx’s analysts for fiscal 1Q18 revenues shows an estimate of $15.3 billion. FedEx saw revenues of $14.7 billion in fiscal 1Q17, and so analysts are estimating YoY (year-over-year) growth of 5% in FedEx’s revenues in fiscal 1Q18.

For the next four quarters, analysts project that FedEx will achieve revenues of $63.4 billion. Over the past four quarters, FDX’s actual revenues were $60.3 billion, which suggests a YoY growth rate of ~5%.

FedEx has a pattern for its operating margins. Normally, its operating margins are down in the first three quarters of the year and substantially up in the fourth quarter. Thomson Reuter’s surveyed analysts estimate that FedEx will report an operating margin of 9.4% for fiscal 1Q18, compared with 9.3% in fiscal 1Q17.

For the next four quarters, analysts predict that FedEx’s operating margins will be 9.6%. Compared with its past four quarters, this is marginally higher.

FedEx’s capex for the Ground segment will be higher in fiscal 2018 on a YoY (year-over-year) basis. The company noted that oversized-package volumes during the December holiday season have risen ~240% over the past ten years. Such packages now account for 10% of FedEx Ground’s overall volumes.The company intends to make further investments in sortation technology, which offers better service for oversized packages.

In fiscal 1Q18, FDX rolled out new technologies to optimize its Ground delivery options for SmartPost. The company has plans to invest in material handling and in lifting technologies to deal with the large sized packages.

FedEx has meanwhile been investing in FedEx Express’s fleet modernization. The company will be replacing the old Boeing (BA) planes with the new 767s and 777s. In FedEx’s Freight segment, the company anticipates lower capex in fiscal 2018 YoY.

In fiscal 2017, FedEx’s (FDX) Express segment reported $34.8 billion in revenues, accounting for 57% of the company’s overall revenues of $63.3 billion. The Express segment includes TNT Express revenues from that period, an acquisition that has given FedEx a strong competitive edge over United Parcel Service (UPS), which has a strong presence in European markets.

FedEx is aiming for an operating income improvement of $1.2–$1.5 billion in fiscal 2020, compared with fiscal 2017, in its Express segment, including TNT Express. FedEx anticipates that the TNT Express integration into its Express segment will be complete by May 2020.

Meanwhile, recent developments in electric truck technology could act as major catalysts for the trucking industry, including for parcel delivery giants.

Analysts and Hedge Funds Opinions

FedEx‘s stock had its “buy” rating reiterated by investment analysts at Robert W. Baird in a research note issued last Tuesday. They presently have a $235.00 price objective on the shipping service provider’s stock. Robert W. Baird’s target price suggests a potential upside of 9.30% from the company’s current price.

As well, BMO Capital Markets reaffirmed their buy rating on shares of FedEx in a report released last Wednesday morning. BMO Capital Markets currently has a $245.00 target price on the shipping service provider’s stock.

Several other analysts have also recently commented on the company…..

  • Stifel Nicolaus restated a “neutral” rating on shares of FedEx in a report on Wednesday, August 16th.
  • Citigroup Inc. restated a “buy” rating and issued a $235.00 target price on shares of FedEx Corporation in a report on Thursday.
  • ValuEngine upgraded FedEx Corporation from a hold rating to a buy rating in a research note on Saturday, June 3rd. UBS AG restated a buy rating and issued a $235.00 price objective (up from $215.00) on shares of FedEx Corporation in a research note on Wednesday, June 21st.
  • Deutsche Bank AG set a $235.00 price objective on FedEx Corporation and gave the company a buy rating in a research note on Wednesday, June 21st.
  • Finally, CIBC upped their target price on shares of FedEx Corporation from $218.00 to $229.00 and gave the company an “outperform” rating in a report on Thursday, June 15th.

FedEx has a consensus mean rating of 1.85, denoting a “buy.” Of the 27 analysts tracking the stock, nine (33%) recommend a “strong buy,” while 13 (48%) recommend a “buy.” The remaining 19% of analysts suggest that shareowners “hold” the stock.The company currently has an average rating of “Buy” and a consensus target price of $231.50.

Several institutional investors have recently made changes to their positions in the stock, to name a few…..

  • Trust Investment Advisors boosted its holdings in FedEx by 1.7% during the second quarter. The fund owned 6,125 shares of the shipping service provider’s stock after acquiring an additional 100 shares during the period. Trust Investment Advisors’ holdings in FedEx Corporation were worth $1,331,000.
  • Northwestern Mutual Wealth Management Co. lifted its holdings in FedEx Corporation by 2.7% in the 1st quarter. Northwestern Mutual Wealth Management Co. now owns 69,903 shares of the shipping service provider’s stock valued at $13,641,000 after purchasing an additional 1,852 shares in the last quarter.
  • Janney Montgomery Scott LLC lifted its holdings in FedEx Corporation by 1.3% in the 2nd quarter. Janney Montgomery Scott LLC now owns 53,299 shares of the shipping service provider’s stock valued at $11,584,000 after purchasing an additional 707 shares in the last quarter.
  • Harbour Capital Advisors LLC lifted its holdings in FedEx Corporation by 21,011.5% in the 2nd quarter. Harbour Capital Advisors LLC now owns 1,424,815 shares of the shipping service provider’s stock valued at $6,556,000 after purchasing an additional 1,418,066 shares in the last quarter.
  • Finally, Madison Investment Holdings Inc. lifted its holdings in FedEx Corporation by 63.6% in the 1st quarter. Madison Investment Holdings Inc. now owns 181,250 shares of the shipping service provider’s stock valued at $35,371,000 after purchasing an additional 70,436 shares in the last quarter.

Harvey’s Options Volatility Indicator

FedEx could realize substantial synergies from its integration of TNT Express. The integration synergies are so far in line with goals, as reflected in TNT’s results, and the 25% rise in the fiscal 2018 dividend to $0.50 per share could give FDX stock the boost it’s looking for.

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

** OPTION TRADE: Buy the FDX JAN 19 2018 220.000 CALL at approximately $7.80. Place a pre-determined sell at $15.00.

Note: No protective stop losses added -- but if you wish to do so make it $3.20.

 

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

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Options traders win because they are successful.





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