A lower-risk trade on a delivery giant with cheap valuation heading into earnings

We’ll review the fundamentals of a delivery giant and how to trade it before earnings this week. “Neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds.” The inscription on New York City’s James A. Farley Post Office could serve as a more poetic creed for FedEx (FDX) , whose slogans include, “When it absolutely, positively has to be there overnight.” FedEx reports earnings on Thursday after the bell. While the aspiration to overcome every challenge to deliver is noble, the reality is that delivery challenges, including the weather, and the economic climate can weigh on operating results. FDX 1Y mountain FedEx, 1-year At 12 times forward earnings estimates, FedEx appears cheap not only relative to the S & P 500, which is trading at 21 times forward earnings, and the Dow Jones Transports average which is trading at 17 times forward earnings, but also to itself. Severe weather significantly impacted operations earlier this year, including at the FedEx Memphis hub. While courier services should endeavor to prepare for bad weather, they cannot control it, and investors should not ignore bad weather’s potential impacts, they should not overemphasize its impact on company valuations. The trade: Calendar spread However the “gloom” of economic pressures is another matter. Revenue growth at FedEx has been nonexistent. In real terms (adjusting for inflation), it has been shrinking. So while the company can continue to improve their operations through their “DRIVE” and “Network 2.0” initiatives, they cannot control the economic climate anymore than they can control the weather. These uncertainties may be the reason the stock is so cheap, and it may also be the reason the options expiring this week aren’t particularly cheap. The options market is implying FedEx could rise or fall by about 7% by week’s end. One way to play these elevated premiums is by using a “calendar spread.” I was looking at the March 22nd weekly, July 250 put spread. Buying the July 250 puts and selling the weekly 250 puts against them. The trade: Selling March 22, $250 Puts Buying July 19 $250 puts The logic behind this trade is that the headwinds of operating challenges may already be baked into the valuation of FedEx at present levels. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.