Shares of logistics and courier company FedEx have remained stable in 2021
Management recently announced robust Q2 results and revised outlook fueled optimism for FDX stocks
Long-term investors should consider buying the dips in FDX stocks, especially if they fall toward $250.
Stocks in heavyweight logistics and delivery FedEx (NYSE:) fell 0.8% in 2021. In comparison, there has been a 31.7% increase in the past 52 weeks.
On May 27, FDX shares passed over $319 to hit an all-time high. But since that peak, they are down more than 19%, closing at $257.49 on Wednesday. The stock's 52-week range was $216.34 – $319.90, while the company's market cap is approximately $68.3 billion.
In 2020, the global courier, express and parcel (CEP) market was estimated to be approximately $370 billion. By 2028, it is projected to reach nearly $600 billion, with a compound annual growth rate (CAGR) of about 6%. Despite the meager returns for FDX in 2021, FedEx's US market share is close to 50%. Its main competitors include United Parcel Service (NYSE:) and Deutsche Post (DE:) (OTC:), better known as DHL.
FedEx released better-than-expected data on December 16. The company's fiscal year ends on May 31. Decreasing staff pressure and strong demand created tailwinds for the logistics group. Revenue was $23.5 billion, up 14% year over year. But diluted non-GAAP earnings per share (EPS) held steady at $4.83.
About the results, CFO Michael C. Lenz said:
“FedEx operating income grew in our second quarter….While adjusted earnings per share were unchanged year over year, this year's effective tax rate was significantly higher as last year's earnings benefited from a $0 tax break .71 per share."
The company has also revised its forecast for FY22. Management now expects adjusted earnings per share of $20.50 – $21.50 from its previous guidance of $19.75 – $21.00. Meanwhile, the board of directors has approved a new $5 billion share repurchase program.
Before the release of the quarterly results, the FDX stock was trading around $240. Since then, investors have pressed the "buy" button, which has caused the value of the shares to rise. surpass" rating.
Analysts also have a median 12-month price target of $311.93 for the stock, representing an increase of about 21% from current levels. The 12 month price range is currently between $205 and $364.
Analyst consensus estimates polled by Investing.com.
Chart: Investing.com
Also according to some valuation models, such as the dividend discount model or the DuPont analysis, the average fair value for FDX stock through InvestingPro is $332.76, implying a potential increase of about 29%.
InvestingPro FDX fair value
Graph: InvestingPro
In addition, we can look at the financial health of the company determined by ranking more than 100 factors relative to peers in the industrial sector. In terms of growth, FedEX scores 4 out of 5 (top score). Overall performance is rated as "good."
The latest P/E, P/B and P/S ratios for FDX stocks are 13.9x, 2.7x and 0.8x. By comparison, those stats for peers are at 15.7x, 3.3x, and 1.2x. Readers may also be interested in the fact that the UPS inventory count is 29.0x, 15.6x, and 2.0x.
In the coming weeks, we expect FedEx stocks to trade in a range, possibly between $240 and $260. Once it has established a foundation, another move is likely to be made in 2022.
Adding FedEx stocks to portfolios
short-term volatility might consider buying the stocks around these levels for long-term portfolios. Analyst consensus expectations have set a target of $311.93.
Alternatively, investors may want to consider buying an exchange traded fund (ETF) that has FDX as a stake. Examples include:
iShares Transportation Average ETF (NYSE:),
American Customer Satisfaction ETF (NYSE:),
Invesco S&P 500® Equal Weight Industrials ETF (NYSE:)
Vanguard U.S. Value Factor (NYSE:).
Finally, those who have experience with options strategies and believe that FedEx stocks could fall even further may prefer to do a bear put spread.
Most option strategies are not suitable for most retail investors. Therefore, the following discussion is provided for educational purposes only and not as an actual strategy to be followed by the average retail investor. $257.49
In a bear put spread, a trader has both a long put with a higher strike price and a short put with a lower strike price. Both branches of the trade have the same underlying stock (i.e. FedEx here) and the same expiration date.
The trader wants FDX stocks to fall in price. However, in a bear put spread, both potential gains and potential loss levels are limited. Such a bear put spread is established for a net cost (or net debit), which represents the maximum loss.
Let's look at this example:
For the first leg of this strategy, the trader can buy an at-the-money (ATM) or somewhat out-of-the-money (OTM) put option, such as the FDX February 18, 2022, 250-strike put option. This option is currently offered for $5.75. It would cost the trader $575 to own this put option, which expires in just under two months.
For the second part of this strategy, the trader sells an FDX put, such as the FDX February 18, 2022, 240-strike put option. The current premium of this option is $3.15. The option seller would receive $315, excluding trading commissions.
Maximum risk
In our example, the maximum risk is equal to the cost of the spread plus commissions. Here is the net cost of the spread is $2.60 ($5.75 – $3.15 = $2.60).
Since each option contract represents 100 shares of the underlying stock, i.e. FDX, we need to multiply $2.60 by 100, which gives us $260 as the maximum risk.
The trader could easily lose this amount if the position is held until expiration and both legs expire worthless, i.e. if the FedEx stock price on expiration is above the strike price of the long put (or $250.00 in our example).
Maximum profit potential
In a bear put spread, the potential profit is limited to the difference between the two strike prices minus the net cost of the spread plus commissions.
So in our example, the difference between the strike prices is $10.00 ($250.00 – $240.00 = $10.00). And as we saw above, the net cost of the spread is $2.60.
The max profit is therefore $7.40 ($10.00 – $2.60 = $7.40) per share minus commissions. When we multiply $7.40 by 100 stocks, the maximum profit for this option strategy is $740.
The trader will realize this maximum profit if the FDX stock price is at or below the strike price of the short put (lower strike price) on expiration (or $240.00 in our example).
Investors who have traded options before are likely aware that short put positions are typically assigned at maturity when the stock price is below the strike price (i.e. $240.00 here). However, there is also the option of early placement. Therefore, the position should be monitored until expiration.
Break-Even FDX Price at Expiration
Finally, we also need to calculate the break-even point for this transaction. At that price, commerce will neither gain nor lose money.
At expiration, the strike price of the long put (i.e. $250.00 in our example) minus the net premium paid (i.e. $2.60 here) would give us the break-even FDX price.
In our example: $250.00 ? $2.60 = $247.40 (minus commissions).
Bottom Line
Shipping Heavyweight FedEx recently posted solid gains following its quarterly report. However, equities ended the year flat. Nevertheless, we expect that shareholders will be satisfied with the performance of the FDX stock in 2022.
