Event: BBBY reports its fiscal Q4 earnings after the close today. The options are pricing in about a 6.5% move based on the weekly straddle, relative to 10.25% avg. move over the past 4 quarters, and 8% avg. move over the past 8 quarters.
Sentiment: Wall Street analysts are fairly bullish on the stock with 17 Buys, 9 Holds and 2 Sells, and an average 12 month price target of around $71. Short interest is at its highest level since 2010, at 5% of float. Option open interest has more calls to puts by a ratio of 1.6 to 1. Recent option volumes have been very light, but calls have traded 1.8x puts in the last month.
Fundamentals / Valuation: The BBBY is a 15 P/E name that has had an impressive earnings growth rate averaging 25% from 2010-2012. Consensus analyst estimates for earnings are around 12% annual growth for the next 3 years, which looks cheap based on its valuation. Here is the 5 year chart of trailing P/E:[caption id="attachment_24588" align="alignnone" width="506"] BBBY 5 year chart of trailing P/E, Courtesy of Bloomberg[/caption]
Interestingly, BBBY’s valuation based on P/E has not been over 22 throughout the past 5 years, despite its impressive earnings growth rates. Clearly, market participants have been wary that the past growth would be able to continue into the future, but BBBY has consistently grown earnings nevertheless. Looking at sales growth on its own, analysts still expect 11% sales growth for calendar year 2013, so top line and bottom line are expected to grow together.
The company did see some same store sales weakness in its prior report (that it blamed on Sandy), and the stock has actually been down each of the prior 3 reports, so recent trends have not been favorable. But valuation at 15x doesn’t seem to be pricing in much growth expectation to start.
Price Action / Technicals: The stock was in a steady uptrend above its 200 day moving average in 2011 and the start of 2012. Its weak earnings report in June 2012 broke that uptrend, and the stock has had 2 weak earnings reports since then, both resulting in big down gaps on major volume, as shown on the volume panel below:[caption id="attachment_24590" align="alignnone" width="634"] BBBY 2 year daily chart, Courtesy of Bloomberg[/caption]
However, the stock has broken back above the 200 day ma in 2013, and strong support lies in the 60 area. Resistance is near the previous highs around 70.
Volatility: The 30 day implied volatility (red) has moved quite a bit higher into earnings, as traders underpriced the earnings-related moves on the prior 3 earnings gaps lower.[caption id="attachment_24591" align="alignnone" width="656"] 30 day IV (red) vs. 30 day RV (blue), 2 year chart, Courtesy of LiveVolPro[/caption]
However, current realized volatility for BBBY is quite low, so despite the high level of the recent earnings moves, the current move of 6.5% might not be underpriced given the overall backdrop of lower volatility.
My View: From a valuation standpoint, BBBY looks quite cheap, especially when compared to the majority of retailers in this market. Traders have been trained to expect disappointment based on what happened on the earnings reports in 2012, so that has depressed the stock’s current valuation. Having said that, I have no strong read for what the current quarterly report might bring. Technically, support lies at 60 and resistance at 70, and volatility pricing is high, but again, likely due to prior earnings moves. I thought about selling a longer-dated 60/55 put spread as I do think the fundamental valuation is favorable even if it’s a weak report, but the company’s previous whiffs keeps me away.