September 16, 2019 BARRON’S M5
Bernstein analyst David Vernon argues
that the market is “too negative” about the
737 and is missing potential catalysts for
United stock. Those include continued expan-
sion of “premium plus” seating on its air-
planes, better credit-card economics, and the
company’s spring investor day.
More than that, United stock is just too
cheap, Vernon says. The company has a
market value of about $23.6 billion after ris-
ing 5.9%, to $91.35, this past week, yet the
company’s assets are worth $25.7 billion
once net debt is subtracted, the biggest dis-
count among the four major carriers.
“United stands out as an overly discounted
carrier, given its improved ability to gener-
ate a return closer to industry leaders,”
Vernon writes. His has a $107 price target
on United stock, implying a 17% gain.
That’s one heck of short squeeze.
Playing FedEx Ahead of Earnings
FedEx reports its quarterly results on
Tuesday. Good luck trying to predict how
the stock will react.
The express shipper is expected to report
a profit of $3.17 a share during its fiscal first
quarter on sales of $17.1 billion, according to
FactSet. But knowing whether FedEx (FDX)
will beat or miss hasn’t always been much of
a help. In the recent past, shares have
traded down after beating Wall Street expec-
tations and traded higher after management
offered weak earnings guidance.
Trading earnings reports amounts to a
parlay bet. In that kind of wager, multiple
things have to happen before investors can
cash in. For quarterly earnings, investors
need not only to deduce what a company
will report but also how the market will re-
act to the news. For example, FedEx stock
jumped 3% in July even after management
said fiscal-year 2020 earnings would fall by
“mid-single digit” percentage points because
of a weaker economy and trade uncertainty,
among other factors.
That doesn’t sound great, but weak earn-
ings guidance was probably already re-
flected in the stock price. “Below consensus
but largely within investor expectations” is
how Baird analyst Ben Hartford character-
ized the quarter and explained the stock-
price action.
But while predicting quarterly results is
hard, predicting volatility after earnings are
reported is far easier. FedEx stock has
moved up or down 6%, on average, following
the past four quarterly reports. The stock
has been more volatile lately because of the
macroeconomic weakness mentioned by
management in July, along with internal is-
sues such as the slow-moving integration of
TNT Express, which FedEx bought in 2015.
Since FedEx last reported in July, indus-
trial production has fallen as the U.S.-China
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trade war rages on. As a result, it feels like
a safe—or should we say safer—bet that
FedEx’s results will contain some sort of
surprise that causes its stock to be volatile
after earnings again.
That’s not what the options market
thinks. “The [FedEx] options are pricing in
a move of about 3%,” a Wall Street deriva-
tives trader tellsBarron’s. “So the options
are pricing in about half of recent history.”
That feels wrong to the trader, and it could
be an opportunity for aggressive investors
wanting to play the FedEx quarter with
options.
A stock option is a contract that gives its
holder the right to buy or sell a stock at a
fixed price over a specific time period. The
cost of an option is derived from many fac-
tors, but stock volatility is an important in-
put for option pricing models.
The more volatile a stock, the more valu-
able its options. A stock that swings widely
is more likely to trade above or below the
strike price in a typical options contract.
That’s why the options trader says a 3% im-
plied move after earnings is too cautious.
He expects more volatility after the quar-
terly report.
An options trader would recommend us-
ing a “straddle”—an options trade in which
investors buy a put and call option with the
same expiration date and strike price—to
position for rising volatility. But if you are a
long-term investor, you can simply buy the
stock outright. Barron’swrote positively
about FedEx on July 19, arguing that fears
aboutAmazon.com’s (AMZN) shipping am-
bitions were overdone. FedEx derives only
a small portion of sales from Amazon, and
there is enough growth in e-commerce ship-
ping volumes to go around.
We see no reason to change that view, no
matter what happens on Tuesday. FedEx
has gained 4.2% since our story appeared,
while the Dow Jones Industrial Average is
up 1%. —ALROOT
Industry Action
Performance of DJ U.S. Ind, ranked by wkly % chg.*
Basic Materials 4.20%
Oil & Gas 3.55
Telecommunications 2.97
Financials 1.56
Industrials 1.55
Consumer Services 0.62
Technology 0.57
Health Care 0.28
Utilities 0.11
–0.06 Consumer Goods
*ForbreakdownseepageM32. Source:S&PDowJonesIndices
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