QCOM reports Q4 earnings after the close. Dan laid out the bullish thesis on QCOM back in December, when he bought a call calendar, and then an outright call spread. In the original post, here is what he wrote:
AAPL represents about 6% of QCOM’s sales; while an important customer, not exactly the main driver for a company that analysts expect to grow earnings and sales 16% & 23% respectively in 2013. The company has a stellar balance sheet, with 26% of their $102 billion market cap in cash and no debt, has a 1.67% dividend yield and an existing $4 billion share repurchase program (about $2.6 Bil remaining) announced in the first half of 2012.
Given what appears to be one of the strongest growth profiles in all of large cap tech, at a fairly reasonable price, trading at 14x next years expected earnings, you would expect analysts to be as bullish as they are: 42 Buys, 4 Holds and only 2 Sells with a 12 month price target of $73.75, or about 24% higher than current levels.
Dan made a nice profit on both of those trades as the stock rallied back to 65, but has since stalled as concerns over AAPL and the handset ecosystem have trumped the broader market strength.
What stood out to me in QCOM is that the stock has been stuck between 57.50 (green line) and 65 (red line) for more than 6 months now:
[caption id="attachment_22165" align="alignnone" width="626"]
1 year QCOM chart, Courtesy of Bloomberg[/caption]
The technicals indicate a rangebound situation. But in addition, the fundamental factors seem to be mixed as well:
- This is a relatively cheap growth story (14x P/E for a 15% growth rate), which suggests limited downside potential
- The hardware space, led by AAPL, has had a bit of a growth slowdown in the past 6 months, which could limit the upside as well
- It’s a $100 billion market cap with $26 billion in cash and no debt, so business volatility has less of an impact than on a more levered balance sheet
Put it all together, and a range trade in QCOM seemed like a decent risk/reward bet. I considered the Apr 67.5 / 62.5 / 57.5 put fly for $1.40, which would be profitable if QCOM closed on Apr expiry between 58.90 and 66.10, a reasonable range given the technical and fundamental backdrop. I even thought about the Feb16th 67.5 / 62.5 / 57.5 for about 1.90, which would be profitable by Feb 16th expiry if the stock closed between 59.40 and 65.60. But at the end of the day, I decided that I might do the Apr trade after earnings, since the trade likely only moves 15-20 cents tomorrow if QCOM is close to unchanged.