ADSK report their Q3 after the bell and the options market is implying about a 7.25% move vs the 4 qtr average move of about 7.25%. (in this instance with the stock at 34.00 just take the Nov 34 straddle which is offered at 2.50 and divide by 34.00 gets you about 7.2% move that you would need to make money on that structure by Friday’s close.)
-Wall Street analysts fairly mixed on the name with 9 Buys, 12 Holds and No Sells.
-Short interest has ticked up of late to almost 2.75% of the float.
-Company has a clean balance sheet with almost 20% of their market cap in cash, and no debt.
Stock has been all over the place this year and is currently down 12.5% ytd, down about 28% from the 52 week highs made in the spring and up 43% from the 52 week lows made in August.
Last week Bank of America software analyst Kash Rangan downgraded ADSK from a buy to a neutral but left his 12 month price target at $38.00. The primary driver of his downgrade from his note to clients issued Nov 9th 2011:
Channel sales account for roughly 80-85% of ADSK revenues and our recently conducted reseller survey (sample size=13, total CAD software revenue= roughly $175mn) indicates a slow-down in the momentum seen in last qtr.
The number of resellers with customers buying more design software from ADSK in Oct Q dropped to 46% from 80% q/q, with 38% indicating sales were down >10% (vs. 0% in prior survey).
Europe exposure can drag on growth – ADSK has roughly 40% revs coming from EU. ADSK performance in EU has been stable thus far, however we see potential risk from tighter fiscal policy and uncertainty over the Eurozone sovereign crisis to macro sensitive manufacturing (30-35% revs) and AEC (45-50% revs) verticals that ADSK operates in.
Expect in-line Oct Q and guidance
While our survey indicates that fewer customers purchased design software from ADSK, 67% resellers still appeared to have met their quotas (slightly lower than 70% in prior qtr)…….we expect revs/EPS to be in-line with our ests of $542m/$0.40 vs. cons at $544m/$0.41. In addition, we expect – 1) normal seasonal patterns to hold for ADSK’s seasonally strong Jan Q; and 2) color for FY13 growth to be roughly inline with cons (revs at +10% y/y). However, the upside to guidance that ADSK has delivered in the past (guided FY12 initially to 10% y/y and we est can deliver +13%y/y) may be muted given macro concerns.
MY VIEW: I can’t tell you that I have any strong insight into ADSK’s fundamentals, because I don’t, but reading through a few quarterly previews this morning I can’t tell you that this is a stock that should be bought prior to this evenings earnings report. When I here things like 405 of revs come from Europe and 80% of sales go through channel and the stock is up 44% from the summers lows I just get a little geeked up. Software has been a bit of a mixed bags….some act very well, while others can’t get out of their own way.
MY TRADE: ADSK ($34.49) Bought Nov 33/31 Put Spread for .42
-Bought 1 Nov 33 Put for .68
-Sold 1 Nov 31 Put at .26
Break-Even on Nov Expiration:
Profits btwn 32.58 and 31 make up to 1.58, max gain 1.58 stock 31 or below.
Losses btwn 32.58 and 33 lose up to .42 and max loss is .42 stock 33 or above.
TRADE RATIONALE: I Like the against the grain thinking of the BofA analyst and think that any lack of visibility going forward as it relates to their sales in Europe could cause the stock to re-trace a portion of the recent rally. I like the almost 4 to 1 payout on a move of 10% to the downside.
** THIS IS NOT A HIGH CONVICTION IDEA, I AM LOOKING FOR THINGS TO DO AND I KNOW AND LIKE THE BOFA ANALYST AND HE HAS A GOOD TRACK RECORD. THE POSITION IS HALF OF THE SIZE OF AN IDEA THAT I COME UP WITH MY SELF FROM A FUNDAMENTAL STANDPOINT, BUT I LIKE THE RISK REWARD.