FedEx Corporation: Fundamentally Undervalued and Currently Cheap

FedEx Corporation (NYSE:FDX) with its market capitalization of $50.18B is involved in the business of providing a portfolio of transportation, e-commerce and business services under the FedEx brand. The Company offers its services through companies constituting four business segments: FedEx Express, FedEx Ground, FedEx Freight and FedEx Services.

FedEx caught my attention today after Credit Suisse upgraded its outlook on the stock from a “Neutral” rating to an “Outperform” rating. Following the analyst upgrade, shares of FedEx gained 1.08% in pre-market trading to $176.49. The stock has gained an additional 1.47% to $177.16 as at 1:04PM EST. This piece seeks to explore why you should join the bullish bandwagon FedEx in anticipation of profits from call options.

Fundamentally Undervalued and Currently Cheap

The shares of FedEx have had an impressive bullish run in the last one year as the stock’s 52-week high of $183.71 marks a 40.62% premium over its 52-week low of $130.64. It might interest you to know that the stock currently trades at a 3.56% discount to that 52-Week high. Despite the impressive bullish run that the stock has, a calculation of its fair value with the DCF type (discounted cash flow) model shows that the stock is currently undervalued.

The fair value calculator shows that shares of FedEx are currently undervalued if you use the following conservative parameters. Forecasted EPS of $8.97 to mark a 32.9% forecasted earnings growth on the earnings of $6.75 from fiscal 2014.  Other important parameters include, growth rate of 4.5% annually (low-volatility business) over the next 10 years, terminal growth of 6, and a discount rate of 6.5%. The calculation will yield a fair value of $193.6 to show that shares of FedEx are currently undervalued.

Lower Oil Prices

An important point that will make it easy for FedEx to outperform in 2015 in order to prove the undervalued nature of its stock is the drop in global oil prices. In the last 6 weeks, global crude oil prices have fallen to as low as $45 per barrel before clambering up to some points above $50 per barrel. The drop in global crude oil prices have led to a drop in the price of gasoline, diesel and other petroleum products.

The drop in the prices of fuels then makes it cheaper for shipping and logistics companies to record lower fuel costs and reduce expenses on the biggest item on their expenses column. The reduction in operating costs will thereby generate better operating margins, which will in turn make FedEx more attractive in the near term.

Optimistic Economic Outlook

The fact that shares of FedEx are undervalued and that the company can expect lower operating costs will not be of any benefit to traders and investors if people are not shipping things using FedEx. However, the U.S. economy is growing stronger as we put the last relics of the 2008 recession behind us. The GDP is growing (a healthy 3.2%), new jobs are being created as the unemployment rate continues to fall and consumer spending is on the increase as the U.S. economy stays firmly in a bull market.

The positive outlook of the economy will surely encourage individual and business spending and we can logically expect the increase in business spending to generate the need to ship more items from vendors to businesses and from businesses to consumers.

How to Trade FDX Options

The prospects of FedEx are bright in 2015 and you’ll do well to do a strategic positioning for profits by buying call options. I recommend buying the FDX Jul 2015 180.000 call (FDX150717C00180000) at an asking price of $7.20.

— Daily Option Alerts

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