[private][private]In the last week we have seen 2 fairly large disappointments in the telco equip space; FNSR an optical networking company that gave weak guidance last night and seeing its stock getting punished this morning by 35% (stock was up almost 100% since Nov) SEE CHART…and MRVL, but we will get to that later……….
– FNSR primarily blamed slowdown in demand in China and specifically from one customer, Huawei who they have a lot of exposure too.[/caption]
TXN, which supplies chips to oem’s for cellphones/smart phones and tablet pc’s gave its mid qtr update last night and narrowed it’s previous guidance slightly which is being perceived as negative with the stock down ~4% this morning. Clearly a lot of good news in the stock after the monster rally its had since Sept.[/caption]
Last week MRVL, a component supplier to storage and wireless sectors pre-announced disappointing earnings partially blaming storage but also citing a mix shift of RIMM in emerging markets to 2.5g smartphones where MRVL does not supply RIMM. Company though is citing its almost 70% market share with RIMM in 3G and recent design wins as a future driver……The stock sold off ~12% to 6 month lows on the news…..[caption id="attachment_424" align="aligncenter" width="300" caption="MRVL 5 month chart"][/caption]
HERE IS THE NEEDLE THREADING PART:
RIMM reports earnings March 24, options market currently implying about a 10% move post earnings which is approximately inline with its avg over the last 12 qtrs of ~10.5%…..
PRICE ACTION: stock has performed very well this year up almost 11% ytd and up about 50% since Sept 1st, dramatically outpacing the S&P500’s ~25% gain. Much of this out-performance has to do with the excitement surrounding their impending tablet release (the Playbook) by the end of March.
MY VIEW: while the Playbook will be a necessary product for RIMM to retain mind-share in the mobile space, the r&d and marketing costs are likely to weigh on margins near term. Additionally, the companies smart-phone portfolio remains weak and not likely to have any meaningful refreshes until 2H 2011 while they continue to lose share to AAPL and Android. As MRVL told us last week the continuing shift in emerging markets towards 2.5g phones may help with units but certainly wont help the companies ever declining ASPs. I would expect VZ iPhone launch in Jan hurt RIMM sales in the qtr and likely to continue…..I expect weak guidance…..and the stock to give back the gains on the year. Make no mistake about it, this is a cheap stock trading ~10x earnings with potential double digit sales growth…..
-with history of volatility around earnings express bearish views with Put Spreads rather than outright short of stock….DEFINE YOUR RISK.
TRADE: BUY the APR 62.5 / 57.50 Put Spread for ~1.60
– Buy 1 APR 62.50 Put for 2.80 and
-Sell 1 APR 57.50 Put for 1.20
Break-Evens on APR Expiration:
Upside: Stock 60.90 and 62.50 u can lose up to 1.60, above 62.50 lose 1.60 in premium that you paid for the Put Spread.
Downside: btw 60.90 (down ~5%) and 57.50 (down ~10.5%) you can make up to 3.40 (or more than 2x the money that you paid for the spread, below 57.50 you will make the entire 3.40.
TRADE STRUCTURE RATIONALE:
Due to RIMM’s volatile history post earnings, outright option purchases tend to be fairly expensive in the earnings month and make the ability to make money on direction that much harder as the break-evens are very wide…for example if you were just to pay 2.80 for the APR 62.50 put your break-even on APR expiration would be 59.70, down 4.70 from current levels or down about 7.5%. My goal with the Put Spread is to identify where i think the stock would go given what the options market is pricing and what the technical are telling me (see chart below). Any earnings disappointment, weak guidance or delay in the Playbook should have the stock down to that support level around 58 or the previous low from Jan.