DELL: Q4 Report Tonight After The Bell, Our Preview, And A Trade For Longs Considering Stock Replacement

by Dan February 21, 2012 2:08 pm • Commentary

DELL ($18.20)  Bio Here

Event: DELL reports fiscal Q4 after the close tonight, the options market is implying about a 5.75% move following earnings, which is basically inline with the average over the last 8 qtrs, but shy of the 7.6% average over the last 4 qtrs.

DELL prior 4 Qtr price action around earnings from LiveVolPro

Price Action / Sentiment / Technicals:

-Stock is up 25% ytd dramatically outperforming the Nasdaq up about 13.7%, and even most large cap tech peers like MSFT up 21%, CSCO up 13%, INTC up 12.5% and ORCL up 12%.

-Wall Street analysts are generally mixed on the stock with 21 Buys, 13 Holds and 4 Sells and a 12 month price target of about $19.00

-Short interest sits at about 4.5%, which isn’t insignificant for stock with a $32 billion market cap.

-Technically the chart is breaking out of a huge multi-year base, now approaching levels where the stock topped out at in April 2010 and Sept 2009 and had a massive break-down from in Sept 2008.  To say that $18-19 is a big level in the stock is an understatement.

[caption id="attachment_8962" align="aligncenter" width="300" caption="5 Yr DELL chart from Bloomberg LP"][/caption]


Options Action Pre-Earnings:  The most active options in the name today are the March 16 Puts with about 9k trading by 12:30pm, most look like they were sold, which is odd to me as they are such a low delta option and a small amount of premium of about .14 with the stock around 18.20.

Implied Vol in the name is obviously elevated into earnings with 30 day implied vol at about 35 and 60 day about 31, vs the 30 day realized vol of only about 14 and 60 day of about 24.

Valuation: Stock is clearly cheap trading at 8.5x fiscal 2013 expected earnings, i guess the real issue is where does growth come from as they are expected to be down 6% yoy.  I guess the bigger question is where is revenue growth supposed to come from as the company struggles with brutal hardware competition on the consumer side and trails in software and services where other peers have gotten a fairly healthy head start.

Balance sheet is fairly solid, they have about $5billion is net cash which makes up about 15% of their market cap.  The company has routinely stated they will be active from an M&A perspective, but primarily in services and software.

MY TAKE:  As many readers could guess, this is obviously not a stock that I would buy, I don’t buy stocks at multi-year highs that have rallied 25% in less than 2 months……the easy money has been made in my opinion.  Now in full disclosure I shorted this stock 10% lower as I thought the rally was overdone given the potential issues arsing from component shortages from the floods in Thailand last year.

Longs Could Consider Stock Replacement:  This is not a trade I have on

DELL ($18.20) Sell Long Stock and Replace with May Call Spread  

Buy May 19/21 call spread for .53

-Buy 1 May 19 Call for .73

-Sell 1 May 21 Call at .20

Break-Even On May Expiration:

Profits btwn 19.53 and 21 make up to 1.47, max gain above 21 make full 1.47, or ~8% of the underlying.

Max loss of .53 if the stock is 19 or below, lose up to .53 btwn 19.00 and 19.53