$HPQ Fiscal Q1 Earnings Preview

by Dan February 20, 2013 3:01 pm • Commentary

Event: HPQ reports fiscal 2013 Q1 earnings tomorrow after the close.  The options market is implying about a 6.5% move on earnings, which is shy of the 7.5% average over the last 4 qtrs.

Sentiment:  Wall Street analysts are negative on the stock with 4 Buys, 22 Holds and 10 Sells with an avg 12 month price target of ~$13.  Short interest sits at only 4% of the float, down from 6% in November.

Options Volumes / Open Interest:  Open interest has shifted over the past 20 days, from an even split between puts and calls to greater open interest in the calls today, at a ratio of 1.2 to 1.  

Volumes have reflected that, as calls have traded twice as much as puts in the past week.  The Mar 18 calls have the highest open interest, at over 40k.

Price Action / Technicals:   HPQ has had a strong rally since mid-November, but it’s still actually trading below its 200 day moving average, which has acted as resistance for 2 years now.  Here’s the 3 year chart:

3 year daily chart of HPQ, Courtesy of Bloomberg
The stock is still in a downtrend despite the recent bounce, though it’s testing the 200 day for only the second time in the past 2 years.

Valuation / Fundamentals: Valuation is purely irrelevant here and by all accounts it is a “Value Trap” in the classic sense of the term.  Last year management slashed earnings guidance to levels (consensus is now down 18% year over year) that may be achievable depending upon how swift the company’s restructuring delivers on cost savings.

If investors don’t see a path to revenue growth in what is arguably the most challenged environment for PCs ever, there will frequent calls for the company to be broken up, which likely sees a sum of the parts that could be above $20.

Vol Snapshot:  HPQ implied vol is close to where it has been prior to the past 4 earnings reports, as shown by the 1 year chart of 30 day implied vol (in red) vs. 30 day realized vol (in blue):

[caption id="attachment_22873" align="alignnone" width="758"]1 year chart of 30 day IV vs. 30 day RV in HPQ, Courtesy of LiveVolPro 1 year chart of 30 day IV vs. 30 day RV in HPQ, Courtesy of LiveVolPro[/caption]

Screen Shot 2013-02-20 at 2.40.45 PM


In short, implied volatility is priced fairly based on the last year’s history in HPQ.

My View:  current estimates could be low enough, and the company is not likely to refresh full year 2013 guidance, so the stock could be left to trade on management commentary about restructuring efforts.  My view is that their restructuring will be a failure……we are looking at a few ways to play and will post on any trades that we like prior to the print.