Will FedEx Take Off Again Soon?

FedEx ( ) tanked over $22 per share on Sept. 21, after reporting disappointing results for the quarterly ended Aug. 31. Analysts who loved it last May near $320 were swearing at it as they sold in the $228 - $230 range. I didn't hear one money manager on CNBC that was enthusiastic about buying, or adding to the stock even as it set a new 12-month low. The firm's long-term record has been excellent. Over the full decade ended last May every major business metric rose substantially. The shares were a bit expensive, relative to their own normalized valuation last spring. It should have been no surprise, then, that the stock regressed on worse than projected profitability. At about $229, though, FedEx appears modestly undervalued on the newly issued, $18.75 or so, fiscal year 2022 guidance. Since 2011, FedEx typically fetched about 15.4 times earnings accompanied by around 0.84% in current yield. As of Sept. 22, those numbers sat at just 12.2 times the downwardly revised estimate while yielding 1.31%. That suggests the bad news is already more than fully baked into the quote. Why did the quarter disappoint? Like many firms, FedEx is experiencing higher labor costs and inflation in materials. Price increases ranging from 5.9% to 10% or so have already been announced. Future results should start benefiting from that within 90 to 120 days. Inflation is not going to be transitory but neither are the price increases. Hitting even the reduced estimate for the year ending May 31, 2022, would establish a new all-time record. FedEx's future looks as bright as ever after getting past this two- or three-quarter speed bump. Seeing FedEx back at $270 - $290 within a year seems like a very good bet. Independent research from Morningstar ( ) is pretty much in agreement. Morningstar deigns to provide year-ahead goal prices but does let us know their view of present-day fair value for each stock they cover. For FedEx that number has been reduced to $245 in the wake of the latest news. As FedEx's announced price increases start fluffing up the bottom line that figure is sure to rise. Quantitatively based FastGraphs hadn't changed its numbers since the company's press release. Its old May 31, 2022, estimated fair value for FedEx sat at $299.58. Now, using a more conservative price-to-earnings ratio of just 15 times and an $18.75 estimate, it has been nudged lower to $281.25. That still represents a shot at an over 22.3% plus dividends rebound over the coming seven months. Yahoo Finance is also behind in terms of updating their 12-month target price in light of the now lower earnings projection. A less than 12% earnings per share reduction though, seems overblown with the shares now down by 28.3% from their May 27 peak. FedEx is a top-quality name at a now very reasonable price. There's no reason to sell, or avoid the stock near $229 - $230. Conservative accounts with a feel for options and extended time horizons are now presented with a great play. The option exchange just started offering January 2024 expiration date puts on FedEx. Here were actual prices on those as of the close on Sep. 22, with FedEx at $229.75. Shorting naked puts at $230, $240 or $250 strikes brought in from $4,300 to $5,400 per 100-share contract. Worst-case, forced purchase prices dropped to between $187 and $196 depending on the strike price employed. Margins of safety ranged from 14.4% to 18.3% from the already low trade inception price. Many people shy away from selling long-term equity anticipation options due to the long duration until expiration day. There are some major benefits from doing that, however. Getting to hold other people's money for long periods is equivalent to an interest-free loan of thousands of dollars in this case. Deferring taxes for about 3 1/2 years is pretty nice, too. So is knowing you can be modestly wrong and might still be profitable. Best of all, based on history, FedEx is almost certainly going to become more valuable on an absolute basis over the next 28-months. That implies FedEx's share price should rise accordingly, rather than fall. Try as I might, I found just one perceived negative to extending the trade out to January 2024. How conservative are the put options recommended earlier? The one-year chart below shows that even the most aggressive, $250 strike price, put's break-even of $196 per share would have been far, far below where FedEx changed hands during the entire 12 months. FedEx spent most of that year hovering between $250 and $300. I think FedEx will be quite a bit higher pretty soon, making today's buyers happy. It doesn't even need to go up at all for put writers to come out ahead due to the collecting of substantial time premiums. Any close of $250 or higher on Jan. 19, 2024, will generate best-case results of keeping 100% of all premium received on all three of the detailed put sales. There might be more exciting high flyers than FedEx for the year ahead as an equity holding. I can't find many better bets for pocketing thousands of dollars up front that could produce great results even if FedEx barely moves higher. Stop listening to negativity from clueless analysts who didn't recommend selling near $320 when the shares were expensive. Buy some FedEx shares, sell some LEAP puts or consider doing both.

Will FedEx Take Off Again Soon?

FedEx will be quite a bit higher pretty soon, making today's buyers happy. It doesn't even need to go up at all for put writers to come out ahead.

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