Today we got this from FDX:
FedEx Corp Monday sharply cut its quarterly profit forecast, citing higher-than-expected fuel costs and severe winter weather that disrupted delivery operations in the U.S. and Europe.
So, the obvious question: Is this a good short? Answer-Yes and No
Lets look at the technical setups first:
Above is a 3 year weekly chart of FDX. Using EW charting, we can see the 1st 5 wave completion top in 2009/November. Then we moved into a 2nd Wave correction; which is called an "Irregular Correction". Note Wave B makes a minor new high in March 2010, then Wave C moves slight below Wave A down to the rising wedge trend line. This is text book EW Irregular Correction.
If my Wave counts are correct, and that is only IF, we can expect a simple corrective pattern for FDX coming up. This simple A-B-C correction is slow to develop and hard to even spot for a while as the stock will only move marginally lower in price in the A-B portion of the move. Wave C of the correction we suspect will complete at the 50% Fib retrace of the 2009 low to 2011 high, or $65.
Here we use a Fib Fan to further support our EW counts. The 45 Gann angle was broken in October 2010 and a failed retest was completed in December 2010.
Gann would suggest this stock is setting up for a correction.
Here we divide the Fedex performance by the S&P 500 large caps. By doing this we can look even further under the hood at price action. While the FDX chart shows a nice strong gap from the 200 day ma, this chart tells a different story. This is setting up for a triple test of the 200, with MACD already turned lower and obvious weak upside price action. Yet one more attempt to confirm our EW theory.
Here we have the FIB retrace possible from 38% to 61%. Because of the Wave 2 Irregular Correction, we expect Wave 4 to be a simple A-B-C correction, completing probably around the zero number $60-65.
Can we turn to valuation for a pull back clue and and look out into the future 12-18 months?
When I look at valuation, I go straight to the balance sheet and look at Assets verses Liabilities; compared to broader market asset/liability ratio or competitor asset/liability ratio. Its never correct to just look at p/e or p/s or book stand alone. We have to look at what the market is willing to pay at any given time for similar equity or index value based on asset/liability ratio.
FEDEX reported in December:
Assets of Cash $1877 / Inventory $400 / Property-Equipment $15266 = Total $17543/assets
Liability of Salary-AP-AE $4863/Long Term Debt $1667/Pension-Insurance-ETC $5002= Total $11532
Thus Liability $11532/Asset$17543 = .65 ratio-CHEAP! This tells me that Fedex shares are only costing me .65 cents for every $1 of liquidation value.
Right now the Non Farm Corp Companies ratio is $13 to $1 for S&P, all time leverage high. In other words stocks right now have basically no value for the shareholder-which might be why insiders are selling at 500-1 record pace. However Fedex is very cheap compared to any historical standard.
Now, lets run the numbers for the competitor UPS-remember its a matter of what the market is willing to pay for shares in relation to competitor or broader market that determines under valued or over valued.
UPS reported in November:
Asset of Cash $3020/ Inventory-Property $17471 = $20491
Liability Wages-Insurance-Taxes-Etc $6801/ Long Term Debt $8648 / Pension $4850/ Insurance $1723 = $22022
Thus Liability $22022/ Asset $20491 = 1.07 ratio-expensive.
If we take UPS 1.07/ Fedex .65 = 1.64 times current Fedex price $93 = $152 PER SHARE for Fedex if valued same as UPS.
VectorVest list the value of FDX at $106-this is the target we agree with. WHY?
We believe UPS at 1.07 is 30% over valued based on average market leverage of 1.04 over the last 10 years.
If shares of FDX pull back to the 50% retrace level at $65 as we believe; and the ratio of 1.64% under valued to UPS shares holds; then that gives you a price target of $106 either way. Either $65 x 1.64 or $152 subtract 30%.
Assuming the ratios hold- Fedex will be $106 12-18 months, but only after it goes to $65 first.
Today we got this from FDX: