INTC reports Q1 results and will issue Q2 guidance tonight after the bell. The Options market is implying about a 3.5% move following earnings which isn’t too far off from the 4 qtr avg move of about 3.77%.
-INTC is just one of those companies that most of us take for granted as consumers because we generally can’t see or feel their products. The stock in some ways reflects this sort of product anonymity, especially in a time where the tech products that we have in our hands or use the most frequently in our daily routines garner the most media and stock market attention.
-The stock though, closing at new 52 week highs yesterday, and in fact trading at levels not seen since mid 2005 seems to be bucking the general mixed reception that the Wall Street analyst community has placed on the name with 27 Buys, 25 Holds and 4 Sells, and an avg 12 month target of about $29. Wall Street analysts only expect INTC to grow earnings and sales by about 3% and 5% respectively this yr after the 2 previous year of 24% sales growth.
-There appears to be a bit of a disconnect btwn the tepid expectations and the almost evenly mixed recommendation (Buy and Hold) from the Sell-Side, and what Investors feel about the prospects for this company. The chart below shows the Nasdaq composite which is almost 5% off of last month’s 52 week highs, while INTC appears to be on the verge of breaking out.[caption id="attachment_10614" align="aligncenter" width="300" caption="1 Month Nasdaq Comp vs INTC from Bloomberg"][/caption]
MY VIEW: Investors have been drawn to INTC of late (stock is up 17% ytd, slightly outpacing the Nasdaq) for the hope of improved performance in the Tablet market and for product cycles related to Windows 8 in the back half of the year and a fairly healthy near 3% dividend yield.
I guess the gazillion $ questions are; how much good news is in the stock at current levels? Even after a nice rebound from supply constraints of HDD from the Thai Floods in the second half of 2012, at what point does the company’s near record gross margins guidance for the full year (at about 64% at the midpoint), set up for a mild disappointment at 7 year highs investors?
-INTC will need a solid “beat and raise” to break the stock out, regardless of what appears to most chartists a massive long term base btwn $20 and $30 dating back 10 years with the only meaningful breaches to the downside of this range in the Post “tech bubble” period and during the “Great Recession” in 2008/09.[caption id="attachment_10615" align="aligncenter" width="300" caption="12 yr INTC chart from Bloomberg LP"][/caption]
MY thought here heading into the print is that there is a lot of good news in the stock and may discount strong Ultra-book adoption, better inroads into Tablet and Smartphones and better than expected Windows 8 upgrade cycle. They are very still dependent on PCs, and the biggest question to INTC’s continued future processor dominance is what does cannibalization by tablet of PCs look like in the new mobile world? Stock only trades at about 11x 2012 expected earnings, possibly because those single digit growth estimates for the next couple years are as good as it gets if they can’t pull a mobile “rabbit” out of their hat.
April volatility is inflated with downside puts heavily skewed. May volatility has a heavy downside skew but is close to inline with farther months.[caption id="attachment_10620" align="aligncenter" width="548" caption="INTC monthly skew by LiveVol Pro"][/caption]
Implied vol in the options is much higher than actual volatility in the stock:[caption id="attachment_10622" align="aligncenter" width="537" caption="INTC IV vs HV by LiveVol Pro"][/caption]
TRADES TO CONSIDER: Depending on your directional view Calendars could make a lot of sense here.
TRADE 1: If you thought that the quarter is going to be a non-event and that the company’s launch of their Ivy Bridge Processor next week and their annual shareholders meeting scheduled for May 17th, could serve as positive catalysts, than you could consider an April/May Call Calendar.
TRADE 1: INTC ($28.40) Buy Apr / May 29 Call Spread for .25
-Sell 1 Apr 29 Call at .27
-Buy 1 May 29 Call for .52
Break-Even on Friday Expiration:
If Stock is below 29 on Friday’s close, the Apr calls will expire worthless and you will effectively own the May 29 calls for .25, that is your max risk at any point during this trade.
TRADE 2: If you thought the stock has just gone too far too fast and that there is a lot of good news in the stock you could consider a short term bearish trade that would capture a greater than expected move following the report.
TRADE 2: INTC ($28.40) Buy the Apr 28/ May 26 Put Spread for .14
-Buy 1 Apr 28 Put for .35
-Sell 1 May 26 Put at .21
Break-Even on Apr Expiration:
If the stock is above 28 then the Apr Put you own will be worthless and you will need to make a decision whether or not to cover the May 26 put which will have most definitely lost value, or turn into a Put Spread by buying a higher strike Put.
Best set up for this trade from a profitability stand point is some where not to close to 28 and not too close to 26, but lots of ways to make money in between.
This position is kind of the opposite of the call calendar and many would ask why are you buying the more expensive month and selling the less expensive month? IN this scenario I am looking to offset the elevated Apr premium, with the time value of the May premium that is 8.5% out of the money. This is much more of a directional play the call calendar.
Check back Later for updates on additional thoughts before the Print.
Q1 EPS: .51, Revs: $12.84B, Gross Margins: ~63%
Q2 EPS: .55, Revs: $13.4B, Gross Margins: ~63%
12 EPS: 2.45, Revs: $56,855, Gross Margins ~64%