Here we revise
our tentative
model for the evolution of FedEx (NYSE: FDX) stock price. In March 2012, we
suggested that this share is slightly overvalued and a negative correction was
possible. Actually, the price has been hovering around $90. The updated model,
which includes monthly closing price for October, foresees no big change in
2012. The positive residual through Q2 and Q3 was stable but fell to zero due
to the change in defining variables, not the price. In any case, the predicted correction
of $5 was within the model uncertainty of $6.4, which is the standard model
error from July 2003.

FDX is a
company from Services sector of the S&P 500 index which “provides transportation, e-commerce, and business
services in the United States and internationally”. We decompose a
FDX share price into a weighted sum of two consumer price indices, one has to
be related to the overall FDX activity and one index is independent on FDX
services. We assume that all goods and
services produced (provided) by FDX should define the share price evolution
relative to other companies. In other words, the FDX relative pricing power is defined
by the pricing power of its G&S. Since other companies are also driven by
prices for their goods and services, which compete with FDX, one need two
defining sets of G&S to estimate the relative pricing power. It is not
excluded that the studied share price can be accurately defined by two CPIs. There
are some measurement errors in all CPIs which are directly mapped into the
model errors. Since we model the monthly closing prices (CPIs are reported at a
monthly rate) the intermonth variations (high/low prices) can be treated as
natural uncertainty of the monthly closing prices. Therefore our pricing model
has two sources of uncertainty.

As in the tentative model, the
best CPIs are selected from a set of 92 CPIs with estimates available from 2000
(one may extend this set). The best fit (in the LSQ sense) consumer price indices are that
of food and beverages (F - CUUS0000SAF) and the index of
communication (CO - CUUR0000SAE2). The latter index
is directly related to FedEx and the former one seems to be mainly independent
and evolving according to own forces. The defining time lags are as follows:
the food index leads the share price by 3 months and the CO index leads by 5
months. The tentative and updated models are as follows:

*FDX(t) =*-4.87F

*(t-3) – 5.09CO(t-5) +*26.50

*(t-*1990

*) + 10*39.05, February 2012

*FDX(t) =*-4.70F

*(t-3) – 5.52CO(t-5) +*25.78

*(t-*2000

*) + 1314.97*, October 2012

where

*FDX(t)*is the FDX share price in U.S. dollars,*t*is calendar time. Figure 1 displays the evolution of both defining indices since 2002. Figure 2 depicts the high and low monthly prices for a share together with the predicted and measured monthly closing prices (adjusted for dividends and splits). The predicted prices are mainly within the bounds of the share price uncertainty and lead by 3 months. Since the measured price volatility is much higher than the predicted one there are some large deviations from the predicted level. In any case, such fluctuations have always ended on the predicted curve. One can use this observation for a qualitative forecast of the future price movements.
It should be noted
the tentative model is partly validated by new data. The model residual error
is shown in Figure 3 with the standard deviation between July 2003 and October 2012
of $6.43.

Figure 1. The
evolution of F and CO indices

Figure 2. Observed
and predicted FDX share prices.

Figure 3. The model
residual error: sterr=$6.43.

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