FedEx Looks Likely to Deliver the Goods

Most blue-chip, large-cap stocks appear fully priced or worse, as the broad indexes continue to carve out new all-time records. A notable exception is FedEx , which took a major tumble in September after reporting somewhat disappointing results for its end of August, fiscal Q1. Shares which had been almost $320 last May plunged briefly to south of $217. Since then, FDX rebounded decently as cooler heads realized fiscal 2022, which ends May 31, 2022, is still on track to see record EPS of about $19.40 or better. The company is extremely well positioned for the new economic environment. There will be more shipments of goods at now increased prices from both FDX and its main rival UPS . As those price increases kick in EPS are sure to grow rapidly, reversing the temporary dip suffered last quarter. FedEx's past decade was quite impressive across all major metrics. Better still, while continuous holders more than tripled their money the shares actually lagged both EPS and dividend growth. FDX was recently offered at a below-average multiple, while paying an above-normal current yield. It fell over the past few days to close at $247.35 on Wednesday. Simply reverting back to a more typical valuation could easily send the stock back to near $300 by June of 2022. That goal is far from an upper limit. FedEx topped out above $305 during COVID-ravaged 2020 and almost $320 earlier in 2021. Both Value Line and Yahoo Finance analysts see higher revenues and earnings next year and beyond. Were FDX to trade at 17.5-times earnings again as it did in 2018, 2020 and earlier this year it could reach about $339 by next summer. Yahoo Finance's estimate for fiscal 2022 is a bit higher than Value Line's view. Longer-term prospects appear equally promising. They could send FDX to between $405 and $550 per share not later than 2026. Owning shares outright offers unlimited upside along with a bit of income along the way. If the potential gains detailed are too tame for you consider selling some LEAP puts out to Jan. 20, 2023 or Jan. 19, 2024. Actual pricing on the 2024 series at strikes from $240 through $270 are shown below, with FDX then trading at $253.88. Worst-case, forced purchase prices dropped to between $204.50 and $218.30 depending on the strike price employed. If you agree that FDX is headed higher, it's hard to worry about the prospect of being forced to own it 14.0% to 19.4% cheaper. Future stock market action can never be guaranteed. That said, every one of the break-even prices shown would have been lower than FDX's momentary nadir ($216.34) dating back more than a full year. I previously wrote up this idea in late September shortly after FDX's sell-off. I was a few days early in starting to play but look pretty good on those September trades now. Here is the original graphic showing pricing for the 2024 expiration puts at strikes from $230 to $250 with FGDX at $229.09. Those who followed my advice back then are already sitting on substantial paper gains of 20.86% to 26.65%. You always get the best put premiums when fear is in the air as it was just after the earnings disappointment. It also shows why you needn't be afraid of selling long-term puts. You still have the ability to buy to close much earlier. Selling with plenty of time to go allows short-term problems to fade into distant memories. It also brings in the largest possible up front premiums. A third benefit is the value of time is adding to the underlying company's true value. If FDX averages $21 in EPS over the next two or more years it will add around $35 to $40 to book value net of dividends paid out prior to expiration day. That factor alone provides a nice margin of safety if you choose to hold your short put positions to maturity. Buy some FDX shares, sell some puts or consider doing both.

FedEx Looks Likely to Deliver the Goods

Let's unpack this bargain-priced transport name.

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