FDX Update

Stock Rallies, But Calls Remain Undervalued

By Bryan Bottarelli
Wednesday, June 21, 2006 11:44 AM EST
Wed, 21 Jun 2006 16:44:00 GMT

Dear Bottarelli Research Member,

This morning, FedEx (FDX – NYSE) surprised investors when they announced that their net income rose to $1.82 per share. This beat Wall Street estimates of $1.77 a share and soundly surpassed last year’s $1.46 per share.

FedEx also said that they expect earnings per share in fiscal 2007 first quarter to come in between $1.45 to $1.60. Since Wall Street analysts were projecting earnings of $1.42 per share, this really got FDX investors excited. On this news, FDX stock is up $4.32, good for a 4% gain. Unfortunately, our July 120 Calls (FDX GD) are not participating in the upside rally as much as they should be.

FDX

Yesterday, for example, FDX stock dropped $1.30 at the close — and this down-move pushed your FDX July 100 Puts (FDX ST) up past $1.00. It would be logical to think that a $4.00 up-move would have an even more powerful effect on our calls. In fact, I figured that a $5.00 up-move would make the calls worth around $1.45, but as it stands, the last trade was only $0.70. In terms of the total basket, we’re currently showing a value of $1.00. So obviously, I think the calls are grossly undervalued at current levels.

For some reason, the FDX puts are showing a much greater propensity to rise (and fall) than the FDX calls. This could be a case of floor traders lowering volatility in FDX options now that the earnings announcement is out. Or, it could be a case of order flow not coming into the calls — which has allowed traders to keep price premiums at depressed levels. Either way, I think we need to hold each side of the position. If FDX continues to rise, we’ll get out with a profit. And even if FDX falls, the puts have shown the ability to make some big-time jumps. I’ll keep a close eye on the situation and keep you completely up to date.

As far as our other positions go, mostly all of our “Aftermath Report” plays are showing nice upside today, highlighted by Caterpillar’s (CAT — NYSE) $1.46 up-move on the news that their sales in the first three months of the year came in very strong.

CAT

Pepsico (PEP – NYSE) is also moving higher — and Las Vegas Sands (LVS – NYSE) has turned an early-morning loss into a mid-morning gain.And although our protective put play on the DJX is down today, it’s imperative that we own a certain level of downside protection against our upside call positions. After all, you know full well how quickly this market can turn around on us! As always, I’ll monitor everything we have open and update you if any new action needs to be taken.

Lock and load,

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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