EVENT: IBM (163.95) reports Q1 earnings on Apr 19th after the market close.
-options market currently implying about a 3% move post earnings which is essentially in-line with its 8 qtr average.
PRICE ACTION / SENTIMENT / TECHNICALS:
-stock is up almost 12% ytd which is solidly outperforming the S&P500 which is only up 5.25% IBM is up 33% since Sept 1, 2010 vs the S&P 500’s 27% rally.
-analyst community relatively bullish to mixed on the name with 18 buys and 13 holds and no sells.
-investment community had a slightly different take in Q4 as was reported in March 13f filings with 13 of the to 20 holders reducing their stakes, with only 2 staying put and 5 adding.
-Technically the chart is something of a masterpiece. Stock was a massive relative strength leader through out 2009 and based btwn 120 and 130 for latter part of 2009 and most of 2010 until the ginormous breakout last fall. Stock again based at multi-year highs and broke out again……
-Other than the little blip last month, chart appears to be basing again, but at 11 year highs the thing might have to pullback before it can make new highs again.
MY VIEW: Technically you can’t find too many problems with the chart, but when you start to consider some potential headwinds for the company, there may be some room for the stock to retest that 150 level, but anything in the report or guidance will clearly send the stock back towards that trend-line at about 155.
WHAT WE KNOW:
-In early March, the company held an analyst meeting where they primarily went through strategy initiatives and goals for the 2015 time period, but the Street walked away fairly bullish thinking that much of that longer-term “guidance” was conservative (read here).
-IBM’s service unit makes up more than 50% of their revenues, some are making a positive read through from strong quarters and guidance given by ACN and ORCL in the last few weeks to IBM and suggest that they should see similar strength (read here).
-But let’s not just have a victory party for IBM just yet. There are still a handful of near-term headwinds:
1. Recent disaster in Japan should keep a lid on near-term guidance;
2. More than 50% of their trailing revenues come from overseas. With the dollar making 2 hear lows against the Euro it is hard to see the benefits if this were to reverse course.
3. Even though the company said at their analyst meeting last night that they were not look at big acquisitions, with only 5% revenue growth expected this year, the company may need to make a transformative buy (read here.) The company’s balance sheet often places it at the top of the list of potential acquirers.
4. Current valuation at ~12.5x consensus EPS, is pretty fair relative to historical valuations. Especially with expected eps growth of only 14% and sales growth of only 5%
WAYS TO PLAY:
TRADE 1: As you expected, near-term Bearish play into earnings. Looking for a ~5-10% move back to the trend-line, and at that point all bets are off. This is obviously the trade I am leaning towards.
IBM (stock ref 163.95) BUY MAY 160 / 150 Put Spread for ~2.00
-Buy May 160 Put for ~2.80 and
-Sell May 150 Put at ~.80
Break-Evens on May Expiration:
Upside: stock btwn 160 and 158 can lose up to 2.00, Worst Case-stock above 160 lose 2.00 premium that you paid (or 1.2% of the underlying).
Downside: stock btwn 158 (down ~3.5%) and 150 (down ~8.5%) can make up to 8.00. Best Case: stock 150 or lower and make all 8.00 (~5% of the underlying).
TRADE 2: Stock Replacement, Define Risk in What Could be a Rocky Summer for Stocks.
IBM (stock ref 163.95) Buy July Call Spread Risk Reversals. Buy July 170/180 call spread for 2.30 and Sell the July 145 Put at 1.70. Net Cost .60
-Sell the July 145 Put at ~1.70 and
-Buy the July 170 call for ~3.30 and
-Sell the July 180 call at ~1.00
Break-Evens on July Expiration:
Upside:
-stock bwtn 170 and 170.60 lose up to .60,
-stock btwn 170.60 and 180 can make up to 9.40,
-Best Case- stock above 180 (up ~10%) and you make all 9.40 (or ~5.5% of the underlying)
Downside:
-stock btwn 145 and 170 lost .60 premium you paid,
-Worst Case stock 145 (down ~11.5%) or lower and you are put the stock and you lose the .60 premium.