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Stock Report: Fedex (FDX)

Stock Report: Fedex (FDX) - HE II FDX 3 30 13

THE HEDGEYE EDGE

We believe FedEx has the ability to improve margins in its Express division.  With a large revenue base at a 30-year low in margins, the Express division could be a value driver over the next two years.  A tie-up with TNT could drive additional value for FDX shareholders, in our view.

 

Further, we see FedEx Ground as a winner in the US ground parcel market.  That division offers exposure to fast growing e-commerce package volumes.   Finally, FedEx Freight has been surprisingly profitable and may benefit from a rebound in US construction activity.

TIMESPAN

INTERMEDIATE TERM (the next 3 months or more)

Shares of FDX sold off sharply following its fiscal third quarter earnings release.  Markets responded negatively to a sequential decline in Express margins, even though the restructuring does not start until this (fiscal fourth) quarter.  A rebound from what we see as over-sold levels could support the shares near-term.  

 

Management has commented that we should see Express margin improvement in the fiscal fourth quarter.  The macro environment appears likely to be more supportive of Express services demand.  Should the company deliver in fiscal 4Q, the shares may begin to price in improving margins ahead of their actual acheivement.

 

LONG-TERM (the next 3 years or less)

FedEx is a long-term position, in our view.  Reorganizing the Express division is a slow process, in part because high service levels cannot be disrupted as adjustments are made.  Cost reductions build through FY2016 and the long-run result may surprise to the upside.  Margins at UPS and DHL are meaningfully higher, in our estimates, and we see no structural reasons why FedEx Express cannot match its peers.  A TNT tie-up could also facilitate restructuring, in our view.  FedEx Ground has been taking market share from UPS in US ground parcel for over a decade, but those gains may well reach a tipping point in coming years.

ONE-YEAR TRAILING CHART

Stock Report: Fedex (FDX) - HE II FDX chart 3 30 13


BEST IDEAS CALL TODAY: Materials & Dial-in Info

 

BEST IDEAS CALL TODAY:  Materials & Dial-in Info - Best Ideas 2

 

Hedgeye Risk Management invites you to join us today, February 27th at 1:00pm EST for our Best Ideas Launch Part 2.

 

This call will be a follow-up to the introductory call of our dynamic Best Ideas Product which was held on February 11th. The new dynamic Best Ideas Product will track, update and notify clients of important changes and additions to the Hedgeye Best Ideas list.

  

On the call we will highlight our highest conviction calls across Financials, Industrials, Energy and Macro offering at least two high conviction and differentiated investment ideas from each vertical over an intermediate term duration.     

 

 

CALL DETAILS 

  • Date: Today, February 27th at 1:00pm EST
  • Toll Free Number:  
  • Direct Dial Number:     
  • Conference Code: 865921#

CLICK HERE to access the slides associated with this call. For more details please email .  
 

 

 SPEAKERS WILL INCLUDE

  • Financials - Josh Steiner
    • Part of the #1 ranked Institutional Investor and Greenwich Survey team at Lehman Brothers. Buy-side analyst at Amaranth Group & Millennium Partners.
  • Industrials - Jay Van Sciver
    • Co-Founder/Partner at Bishop & Carroll Capital Partners. 12 years as a financial analyst with buy-side coverage of the Industrials Sector. 
  • Energy - Kevin Kaiser
    • Covers the oil & gas sector with a focus on fundamental research on E&Ps, oilfield services, MLPs and refiners.  Princeton hockey alumnus.
  • Macro - Darius Dale
    • Senior Analyst covering Asia and Latin America on the Macro Team. Yale BA.

Buy American

Client Talking Points

Disaster Averted

So much for the end of the world. After the Italian election fiasco which tanked the market, we saw it rally yesterday to close at levels that were nearly the same before Berlusconi and Co. took over. We're not fleeing to "risk off" assets because of a down day in the market and thus, we are not buying Treasuries. We are short the Japanese Yen and will continue to use our levels and tried and true methodology to pick stocks using signals to tell us when the time is right.

Asset Allocation

CASH 40% US EQUITIES 20%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX
HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

"The difference between the $EATFY10 turnaround and the $DRIFY13 - $EAT rethought the buz model while $DRI is defending what has not worked" -@HedgeyeHWP

QUOTE OF THE DAY

"Who is rich? He that is content. Who is that? Nobody."  -Benjamin Franklin 

STAT OF THE DAY

The Commerce Department reported that total orders for goods meant to last more than three years slid 5.2%


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.



Not This Week

“Not this week, thank God.”

-Dwight D. Eisenhower

 

That’s what the President of The United States said to one of his senior advisors “with beads of sweat on Eisenhower’s forehead during the tense debate over whether and when to intervene” in Vietnam in 1954. (Ike’s Bluff, pg 131)

 

As many of you know from your risk management experiences, it’s what you don’t do under pressure that often defines your performance. “Eisenhower was an expert in finding reasons for not doing things recalled Andrew Goodpaster.” (pg 130)

 

That’s why I study the history of great leadership. It helps me empathize with and learn from what Teddy Roosevelt called “the struggle” of other men and women when they were under pressure. It also gives me confidence in making decisions. That doesn’t always mean I’ll make the right call. It just means I’ll have known why I made it.

 

Back to the Global Macro Grind

 

Eisenhower’s legacy is that he didn’t let the French suck US casualties into Vietnam in 1954. He also avoided playing the end of the world card (releasing the bomb) during a time when plenty of Americans had US politicians (LBJ) freaking them out about outer space.

 

If the world ended this morning, I am pretty sure A) I wouldn’t be writing this and B) you wouldn’t be reading anything else. So, with that in mind, and the entire manic media focused on what is so 2010-2011 (Italian Bond auctions), what happened?

  1. Italian Bond Auction was better than “expected”, so bond yields fell, making another lower long-term high
  2. Italian Equities stopped going down right at our immediate-term TRADE oversold signal of 15,511 (MIB Index)
  3. US Equity Futures held onto yesterday’s gains; the 2nd up day in the last 3 (+4.9% YTD)

I’m not trying to be complacent about Italy’s economic risks (just don’t be long Italy, and get over it). I’m well aware of what Eisenhower himself coined as The Domino Theory. We made this call on Europe around this time in Q1 of 2010 don’t forget. It’s 2013, and  we don’t see Italy being the domino that knocks down our bull case for Asian and US Equities right now.

 

That could change. The plan is always changing. And when it does, I’ll be the first to let you know. But, for now, let’s focus on doing more of what we did when people were freaking out about Congress at the end of December:

  1. Buy Asian (China and Singapore) and US Stocks (EWS, CAF, XLF)
  2. Short US Treasuries (TLT)
  3. Short Japanese Yen (FXY)

Why buy American instead of Italian?

  1. US #Housing is ripping (New Home Sales shocked the bears to the upside yesterday with inventory falling, again!)
  2. US Employment #GrowthStabilizing (our rolling non-seasonally adjusted jobless claims model continues to be bullish)
  3. If you have to choose between a criminal, comedian, and Congress, I’d actually choose Congress

Yep, that’s how sad and embarrassing Italy’s #PoliticalClass has become. And neither France nor Japan are too far behind them.

 

So, if you are shorting Treasuries, can’t buy European or Japanese Sovereign Debt, and have to buy something else, why not Asian or American stocks? To be clear, I don’t have to buy anything. But when I do buy something, both the signal and research back it.

 

The last point I want to make this morning is about volatility expectations. I get the front-month VIX is different than the term-structure of volatility’s curve. Looking at expectations, across durations, will amplify my point:

  1. VIX (front-month) TREND resistance = 17.18, and that was only violated to the upside for ½ a day
  2. VIX topped on Monday at another lower long-term-high (on DEC28, 2012 the lower-high = 22.72)
  3. VIX was at 40 in Q1 of 2010 after we were legitimately concerned about European Dominos

As you can see in the Darius Dale’s Chart of The Day, front-month Volatility (VIX) continues to make a series of long-term lower highs as the volume of the manic media’s freak-outs make higher-highs. Think they’ll make the call on the end of the world, together?

 

If this is just a mini-mania of what you saw in November-December (substitute Italy for US Congress), what is it, specifically, that you have a as a catalyst that would stop the VIX from going straight back down to 12 from here?

 

It’s not going to 12 this week. I get that. But the VIX is probably not going back to 22.72 or 42.96 (the SEP2011 freak-out) this week either. If I see anything real developing that changes my view on this, I’ll just change my mind. I don’t have to do that yet, thank God.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr, Shanghai Composite, and the SP500 are now $1, $112.55-116.12, $81.12-82.23, 91.55-94.49, 1.84-1.96%, 2, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Not This Week - Chart of the Day

 

Not This Week - Virtual Portfolio


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