The Event: Report Q2 Earnings July 18th 4;30pm.
-stock is not a huge mover the day after earnings averaging about 2.5% over the last 4 qtrs.
-the implied move in the options market is only about 3%.
-the Street is fairly mixed on the name with 18 Buys and 13 holds.
What We Know:
-In April when IBM reported Q1 the street was surprised by the weakness in services signings even-though revenues in the segment met street expectations in the quarter. Analysts will be watching very closely for any continued signs of weakness.
-Stock has just made a new all time high and is up 44% since Sept 1, 2010 and is in the midst of a runaway break-out. If recent history tells us anything, when the stock consolidates, then sells off a bit and then breaks-out to new highs the rally can easily go for a bit and often stretch to a mid-teens percentage gain.
-chart below displays this over the last year and at this point the rallies are getting slightly shorter……I am not sure IBM has much more to go at this point and even if it did a peak to trough rally of greater than 15% seems very unlikely.[caption id="attachment_3087" align="aligncenter" width="300" caption="1 Yr IBM chart Provided by Bloomberg"][/caption]
Valuation: as far as whether the stock is cheap or expensive I think more of a question what you think the quality of future earnings are and their ability to grow them……Credit Suisse, in a note to clients on June 15th had the following to say:
Valuation is close to fair. With over 50% of incremental EPS coming from M&Aand buybacks over the next five years, the quality of growth is somewhat low.While shares trade at 11.0x our CY12 EPS, we believe shares do deserve totrade at a discount to the S&P. A blended average of P/E, DCF, and HOLT®suggests fair value of $175, implying only 7% upside from current levels, andhence our Neutral rating. We would become more constructive below $150 orwith increased evidence of robust organic growth
I don’t buy run away breakouts and frankly I don’t exactly think that IBM is going to get hit hard on earnings unless there was a miss. Your guess is as good as mine there, some of the anecdotal evidence that we have from other tech names that have recently reported is fairly mixed and doesn’t paint a clear picture.
If I were long the stock and think there was more upside I would consider stock replacement as the stock is up on a spike and I do believe the higher it goes, making new all time highs daily, the harder it could fall with any negative stock specific news or general market pullback. I will use weekly options to make an outright Bearish bet once the reporting date is set and the weeklies are listed.
TRADE STRUCTURES TO CONSIDER IF LONG STOCK REPLACEMENT OR COLLARS:
1st Trade-Stock Replacement, Sell Your Long at 177.40 and Buy Aug Calls
-Buy Aug 185 call for 1.15
-At the money implied volatility are offered at about 16.5 which is slightly rich to the 90 realized vol of ~15.70/
Break-Even on Aug Expiration:
Upside: 186.15 (up 5%) unlimited upside. btwn 186.15 and 185 lose up to 1.15, Worst case: below 185 lose all 1.15 premium.
2nd Trade Against IBM LONG at 177.40: Buy Aug Put Spread Collars.
Protection Against an Out-sized Move Through Aug Expiration Which Will Capture Q2 Earnings
-Sell the Aug 185 Call at 1.10 and
-Buy the Aug 170 Put for 2.00 and
-Sell the Aug 160 Put at .65
PACKAGE COSTS .25
Break-even On Aug Expiration:
Upside: Stock called away 185 up 4.25%
Downside: btwn 177.40 and 170 have losses with stock and the .25 premium that you paid……Protected btwn 170 and 160, none below it though.