Event: DE reports their fiscal Q2 earnings tomorrow morning prior to the open. The options market is implying about a 3.75% move vs the 4 qtr average of a bit higher than 4%.
Sentiment: Wall Street analysts are slightly bullish on the name with 14 Buys, 9 Holds and 1 Sell with an average 12 month price target of ~$100, or ~7.5% higher than current levels. Short interest sits ~3% of the float, which is slightly below the 52 week highs.
Option Open Interest: Current open interest is skewed towards Puts at 1.3 puts to calls with the largest open lines: 6300 of the Jun 90 Puts, 6100 of the Jun 80 puts (these 2 lines could be part of a put spread), 5900 of the June 95 calls, 5k of the Jun 75 puts, and 4700 of the June 87.50 puts.
Vol Snapshot: DE vol moves tend to happen in a fairly tight range, with IV30 usually only ramping up into the mid 20’s the past few cycles. June vol is less than 23 this time around. May, which expires this week is in the 40’s reflecting a one day move on earnings of about 3 to 3.5 dollars. IV is likely to fall into the high teens following the report. Here’s a past year look at IV30 (red) vs HV30 (blue)
Price Action/ Technicals: While DE’s 8.5% gains ytd lag the S&P, it greatly outperforms its heavy equipment peer CAT which is down 2.5% on the year. DE’s out-performance is likely largely due to their lesser reliance on emerging markets for existing sales and future growth (CAT gets ~65% of their sales from outside North America, vs DE at ~36%).
The 5 year chart below shows DE’s amazing out-performance off of the 2009 lows, up almost 280% nearly doubling the gains of the SPX in that same time period. In the last month the stock bounced off of the long term trend line and has rallied nearly 15%, now quickly approaching the 52 week highs and 2 yr resistance.
Estimates from Bloomberg:
- 2Q adj. EPS $2.72, range $2.55-$2.87
- 2Q rev. $9.94b, range $9.55b-$10.44b; mgmt equipment sales
- forecast up 4%
2013 forecast from Feb:
- Net income $3.3b, raised from $3.2b; implies EPS ~$8.47
- based on current share count vs est. $8.60
- Equipment sales up ~6%, increased from ~5%
My View: I don’t have a strong opinion on DE at current levels (I am long a bearish structure in CAT read here), but given the stock’s recent strength I would suggest that the company would have to report a meaningful beat and raise to see new 2 yr highs. The rotation into more domestic cyclicals has clearly benefited a name like DE, but any disappointment could cause the stock to retrace and consolidate btwn its 200 and 100 day moving avg in the range of $85 to $90.
Not much to add on a relative value basis, DE trades at about 10x next year’s expected earnings, vs CAT at about the same. While CAT is in the midst of a substantial earnings hiccup this year due to the slowdown in China and Brazil, analysts expect earnings to grow the next couple years in the mid to high teens, while a DE is expected to see its earnings growth decelerate to mid to low single digits. Both company’s have solid balance sheet with what most would call a reasonable cash to debt ratio, and both pay dividends that yield a bit more than 2%.
IN sum I don’t think this is a good entry point on the long side for a stock like DE given the recent rally and the continued macro headwinds, but I guess I would say that about every stock on the board.