This 120% Profit Beauty in Fed’s Amazon Split

Google+ Pinterest LinkedIn Tumblr

Earlier this summer, logistics giant FedEx (FDX) cut ties to Amazon. It announced that it let a contract to ship Amazon packages expire at the end of June.

For some, this seemed like a very bad idea. And it almost certainly sounds like one on the surface. But a minute of digging will show that this was neither unexpected nor problematic for FedEx.

You see, over the last two years, Amazon has been ramping up its own transportation network. The share of in-house shipping for the ecommerce leader grew from around 16% of all sales in 2017 to nearly 50% today.

UPS’ share of Amazon package delivery dipped a tad from just over 20% to about 16% now. The United States Postal Service saw its share swallowed up, going from more than 60% of packages to just 33% in that period.

The remaining player, FedEx, was the only one not affected by Amazon’s in-house efforts. It was, after all, never a major part of that game. Less than 5% of Amazon packages ever went through FedEx. By the time of its announcement, less than 2% were shipped on FedEx’s trucks.

So, dropping this deal with Amazon will have virtually no effect on FedEx in the near term. Likely, it won’t in the long term either, as no efforts were previously made to increase its presence in that trade.

Yet, investors have been bearish on FedEx for quite some time:

Screen Shot 2019-08-16 at 3.35.50 PM.png

From their early 2018 prices, FDX shares have fallen 43%. And as you can see, this year’s economic concerns haven’t help either. Each time it looked like the company was going to regain some footing, shares collapsed again down to their $150 resistance line.

So, this latest news that it was abandoning Amazon for express deliveries should be the final nail in FedEx’s coffin, right?

Well, actually, this is a pretty smart strategic move. Who is Amazon’s chief competitors? Walmart. Who has exclusive deals with FedEx already? Yep, Walmart.

Already the two companies have a fantastic relationship, only getting stronger. FedEx already has more than 500 of its own locations inside Walmart stores. It is the big-box retailer’s chief shipper. And as the number of small ecommerce packages is expected to increase from 50 million per day this year to 100 million per day by 2026, there’ll be no shortage of work for FedEx.

If that wasn’t enough, consider this… If FedEx dropped Amazon to focus exclusively on Walmart and possibly a few others like Target, a look at those brick-and-mortar stores’ ecommerce business is worth taking.

Walmart just reported its latest earnings, showing 2.8% comparable-store sales growth for the quarter. But the real number worth noting was its 37% year-over-year growth rate in ecommerce business. Target doesn’t report until next week. But in its most recent filing, its digital channel grew 42%.

If FedEx has abandoned Amazon, which was only representing about 1.3% of its total annual sales anyways, for closer relationships with the likes of Walmart and Target, I’d have to say that’s a smart move.

Yet, going back to its stock chart, it’s clear investors haven’t been coming to the same conclusion… yet.

Because of the nature of its business and the wildness of holiday season, FedEx keeps a slightly different financial calendar than most companies. It’s next reporting period will be for its first quarter ending the end of this month. It’ll announce those numbers mid-September.

This will be the first look at its post-Amazon business. And it will be a perfect time for a bounce as investors realize the moves it has made this summer.

I should note, however, that FedEx hasn’t completely cut ties with Amazon. It just won’t be shipping any of those Amazon Prime one- or two-day packages… or same day. It will handle a small portion of “last-mile” and certain ground deliveries. So, even here, FedEx didn’t completely abandoned the ecommerce giant.

Yet, with holiday season approaching, even that loss of 2% of express shipping options for Amazon could give FedEx’s other partners… namely Walmart… a boost. It is desperately trying to get into the one- and same-day delivery business.

So, a lot can happen for FedEx and its shareholders over the next few months. But they all appear to be much better than its share price currently suggests.

This presents a great short-term opportunity…

A Strategy For Short Term Bulls

To play a bounce back from here in FDX, a trader could put on a bull call spread trade. This involves buying a call option with a near-the-money strike price on FDX and selling a second call with a higher strike.

The option premium from that second call helps offset the cost of buying the first one. This reduces the total amount at risk of the trade. It does, however, cap the potential profits.

You can see this tradeoff here:


Source: The Options Industry Council

For a company like FedEx, this is a tradeoff worth taking. You see, the company is undervalued right now… but it isn’t desperately cheap. It does have steady and growing business with the likes of Walmart… and a fantastic position to take advantage of growing ecommerce shipping. But it isn’t exactly a growth stock. It is unlikely to double overnight, even with a killer post-Amazon quarter next month.

Still, a bounce here would make a bull call spread trade quite profitable. In fact, with the reduced risk, it makes the strategy ideal for FDX right now.

Let’s look a specific example to show you what I mean…

A Specific Trade on FDX

Right now, a trader could buy an October 18 $155 call for $9.20 per share and sell an October 18 $165 call for $4.66 for a total cost of $4.54 per share. Since each option represent 100 shares of FDX, that’s a total net debit of $454.

That’s the total amount at risk. And the trader could only lose that if shares fall below $155 for the next two months. With a stiff resistance line just under this price and an all-important earnings report next month, a bounce much higher is far likelier.

The profit potential on this trade too is much higher. To find that, take the difference in strike prices ($165 – $155 = $10), and subtract the cost ($10 – $4.54 = $5.46). Again, since each option controls 100 FDX shares, that’s a maximum potential profit of $546.

In other words, if shares of FDX bounce just a little bit to $165, this trader would be looking at a 120% return on the amount he has at risk… and two full months to capture it.

Now, this move does represent a share price movement of 5.1%. But considering each bounce off its resistance line this year has been far greater than that, this next one after its September earnings announcement should easily clear that mark.

With so much discussion on weakening economic forecasts and Amazon’s dominance, it’s no wonder that investors have cooled to FedEx. But when the company itself posts its next earnings and proves them wrong, this trade should easily pay off.

Write A Comment