WHR: Q2 Preview & Thoughts, No Trade

by Dan July 23, 2012 2:17 pm • Commentary

Event: WHR reports Q2 earnings tomorrow morning before the bell; the options market is implying about a 6% move vs the average of about 9% over the last 4 qtrs, but more in line with the average over the last 8 qtrs of about 5.7%.  

Sentiment:  There are 6 firms that cover WHR on the street, and only 2 (GS & JPM) are in the bulge bracket, and both have a Neutral rating on the stock with Price Targets below where it is trading.  With the stock’s near 25% gain in the last month, short interest has ticked up a bit to about 7.5% of the float.

Price Action: Stock is up 44% ytd and as just noted up 24% in the last month.  Much of the strength appears to be in sympathy with the “supposed” U.S. housing recovery, and then with competitor Electrolux’s recent  better than expected earnings report on the heels of a successful price increase in North America.

Valuation: This is not an expensive stock trading at about 10x 2012 and 8.5x 2 next year’s earnings estimates…..the real issue is getting your head around what those earnings could be…..looking at the recent earnings history you see that there has been a good bit of volatility even as sales have remained in a $2billion range.

             2007        2008       2009        2010       2011       2012
EPS        8.10         5.77        5.82           9.65          2.05      6.64
Sales   19.41B    18.91B     17.10B      18.37B    18.67B     18.59B

Source: Bloomberg

Recent Options Activity: Nothing really to write home about other than on Friday it looked like someone closed 800 of the Sept 65 calls at 5.70 and Bought to open on 1200 of the Sept 70 calls paying 3.20


MY VIEW INTO THE PRINT:  Expectations are obviously high, and I guess what I don’t understand is how the stock clearly appears to be trading with the perceived Tailwinds of a supposed housing recovery in the U.S. (about half of their 2011 sales came from North America), while the obvious Headwinds of slowing growth in Asia, South America and Europe seem have been ignored of late (WHR got about half their sales on 2011 from these regions).

I am just hard pressed to see how the former overcomes the latter and would love to fade this recent move into the earnings announcement, the problem is that options are extremely rich.  I took a look at the name because the volatile history around earnings over the last year, but nothing sticks out to me at the moment, but I wanted to post some of my thoughts in the event it would be helpful to readers.

I will definitely post any trades that come to me in the next hour or so, but if I were to play it would be with defined risk, this is not the sort of stock I would want to be naked short, and I definitely don’t want to be outright short premium.