BBY Report FQ4 Earnings Mar 24 (pre-open), 2 Ways to Play

by Dan March 22, 2011 7:41 am • Commentary

EVENT(S): March 24th (pre-open) company reports fiscal Q4 earnings and Q1 guidance and Apr 14 Analyst Meeting.

-options market implying about a 7% move post earnings vs 4 qtr avg of ~7.5%

PRICE ACTION/SENTIMENT: ~7% ytd vs the RTH (retail holders etf) down ~1.5% ytd.   Chart below shows the massive divergence between the performance of BBY and the RTH since mid December when BBY disappointed and gave weak guidance for their seasonally strong Fq3.

7 month BBY v RTH chart -Bloomberg Chart

-The street is fairly mixed on the name with 12 buys, 13 holds and 1 sell. A handful of analysts have lowered their estimates in to this qtr as they already had the benefit of seeing BBY’s results for black Friday weekend which were disappointing and given competitor’s results in calendar Q4/10 have been able to get a good sense for BBY inability to meaningfully beat their already lowered guidance….the company reiterated that guidance for FQ4 in late Feb so the real focus will be on guidance for Q1.

MY VIEW: with the qtr out of the way and stock trading within a few % of 52 week lows, the guidance will have to be horrible to have the stock break the $30 support level that goes back to mid 2008. I am hard pressed to see any sales turnaround or any of the restructuring decisions put in place late last yr to have a meaningful impact on costs, and investors will likely have to wait until the company’s analyst meeting scheduled for Apr 14 to get more clarity on that….

-aside from their cost structure and some poor expansion plans overseas, BBY faces a daunting threat from AMZN domestically along with a challenging TV selling environment and the mix-shift from pc’s to tablets.   AMZN is a particular problem, especially when it comes to TVs that used to be BBY’s bread and butter. They can just do them cheaper and when BBY’s doesn’t choose to compete on price they have the sort of qtr that they did in DEC.

-there are plenty of headwinds for the company near-term, most of which are not likely to be fixed anytime soon…..that said short interest is slowly creeping back up the levels last seen before the December blow up, so if value investors, shorts or anyone for that matter was given a reason to buy the stock it could really move back towards mid to high 30s.

2 Trades Structures to Play these Events that fall in Apr Expiration:

1st- Contrarian in me looking for cheap ways to get Long: Buy Out of the Money Call Spreads
BUY Apr 33/35 call spread for .54 (stock 31.90)
-Buy 1 Apr 33 call for .77 and
-Sell 1 Apr 35 call at .23

Break-Even on Apr Expiration:

Upside: stock 33.54 (up 5%) u make money, btwn 33.54 and 35 you can make up to 1.46, above 35 (up ~10%) you make 1.46 (almost 3x the premium you paid)
Downside: stock btwn 33.54 and 33 you can lose up to .54 in premium you paid for the spread.
Worst case: stock below 33 you lose all .54


2nd Buy the Move-Get 2 for the price of 1 (In Apr Exp you get Earnings and Analyst Meeting)
BUY the APR 32 Straddle for 2.60
(stock 31.90)
-Buy 1 Apr 32 Put for 1.40 and
-Buy 1 Apr 32 Call for 1.20

Break-Evens on Apr Expiration:
-Upside: 34.60 or higher you make money
-Downside: 29.40 or lower you make money
-Worst Case: stock at 32 and you lose the entire 2.60 you paid for straddle, but likelihood of losing all the premium not great as one of the those options very likely to be in the money especially when u consider that their are 2 events that fall into this expiration……so between 34.60 and 29.40 and you can lose up to 2.60 you paid.

Trade Structure Rationale:
1st: Long Call Spread, trying to be a little contrarian, if you are one of those types who like me try to go against the grain a bit, this one is so out of favor that any good news over these 2 events  could just actually cause the stock to rally a bit…….I don’t want to commit a lot of premium to make this bet that’s why I have chosen a spread that is slightly out of the money and i have chosen a spread vs outright call purchase as option prices are elevated in Apr due to said events.  I have no knowledge that the news would be good and actually if I was this management i would probably kitchen sink the guidance and set up a string of beats in their coming fiscal year……but i like making these sorts of low premium bets when sentiment gets very bad.

2nd: Long Apr straddle,
for the reasons listed above, I think there is clearly a potential for a squeeze that could take the stock to mid to high 30s, but if the management kitchen sinks the guidance then the stock gonna break that key 30 support level (see chart below) and prob not stop till high to mid 20s…..if you like playing volatility around events this could be the structure for you as long as you recognize the fact that you could actually lose all the premium if nothing happens at all….you must have high conviction that the stock will move one way or the other.

[caption id="attachment_618" align="aligncenter" width="300" caption="BBY 3 yr chart showing massive $30 support level -Bloomberg chart"][/caption]