$NTAP Fiscal Q4 Earnings Preview

by Dan May 21, 2013 10:47 am • Commentary

Event:  NTAP reports their fiscal Q4 earnings tonight after the close.  The options market is implying ~6.75%* move post results which is essentially in line with the 4 qtr avg move of ~6.94% and the shy of the 8 qtr avg of ~8.5%.

*The weekly at the money straddle is offered at ~$2.50 or ~6.7% of the underlying stock price, so if you bought that you would need a $2.50 move in either direction by Friday’s close to break-even.

Sentiment:  Wall Street analysts are fairly mixed on the stock with 15 Buys, 22 Holds & 2 Sells with an avg 12 month price target of ~$38.30, or about 2.5% higher than current levels.  Short interest sits at ~5.5% of the float.    The top 10 Holders, own about 38% of the shares outstanding.

Options Open Interest:  Call to put ratio of open interest is around 1.2 to 1, but recent volumes have been heavily skewed to the calls side, with the recent 10 day average ratio above 2 to 1 skewed to calls.  The bulk of open interest is in June and September, spread among the strikes ranging from 32 to 40, the range that the stock has been in all of 2013.

Volatility Snapshot: Vol is not high historically and Implied vol and Actual vol have converged recently. June vol is about 40 and will come into the low 30’s following the event. Here’s how IV30 bs HV30 looks historically with earnings events marked with a E:

Screen Shot 2013-05-21 at 9.13.53 AM
from LiveVol Pro


Price Action /  Technicals:  On a long-term chart, NTAP is a stock that went from a steady uptrend in 2009 and 2010, to a steady downtrend in 2011 and 2012.  Here is the 5 year weekly showing what I mean:

5 year weekly chart of NTAP, Courtesy of Bloomberg
5 year weekly chart of NTAP, Courtesy of Bloomberg

Its recent rally ended the 2 year downtrend, but it’s less clear whether this is the start of a new uptrend, or just a time for consolidation.

There are several reasons for optimism on the 1 year daily chart.  First, the stock recently made a new 52 week high, breaking above the 37 level (red line) on strong volume on the Elliot news:

1 year daily chart of NTAP, Courtesy of Bloomberg
1 year daily chart of NTAP, Courtesy of Bloomberg

Second, the volume in the past month has picked up, mostly on up days, shown by the green oval in the lower panel.  Buyers are getting more aggressive.  Finally, the 200 day ma held as support in April, and is now turning higher.

The 37 area is critical support, and the key level to watch going forward.

Expectations:   After the Elliot news hit the tape, it was rumored that NTAP hired Goldman Sachs to advise them on their “options”.  GS equity research rates the stock Neutral with a $32 12 month price target.  IN their quarterly preview dated May 15th, GS had the following to say about the qtr:

we expect shares to remain range-bound unless NetApp can solve three key concerns, namely:

1) the company needs to clearly outline a plan to adjust its sustained operating expense levels for what appears to be a slower pace of sustained revenue growth,

2) as a more mature technology company with steady cash flow generation, the company should outline how it plans to be more aggressive with its capital allocation activities (buybacks and dividends in particular), and

3) the company should assuage investor fears that it will become overly aggressive with future M&A actions in a bid to chase growth.

While NetApp appears to have made some progress on these fronts in recent months, it is not yet clear that the company has adjusted to the current phase of its corporate lifecycle (i.e., the shift from a hefty growth story to a slower-growth, cash-flow centric company).

MY VIEW:  NTAP doesn’t exactly fall in the “cheap old Tech” category trading at 14x next years expected earnings, with a modest share buyback and no dividend, it is hard to make the argument that near term weak fundamentals can be offset by financial engineering.   Unfortunately given the recent results from RAX and VMW don’t exactly scream getting in front of what could be a drawn out process as investors try to replace some of the board and effect change.  As for an acquisition target it has been rumored for years, but it appears that large IT vendors like ORCL, CSCO and IBM are looking more towards cloud plays.   We don’t love the idea of playing in front of earnings as we expect mediocre results and guidance, and the company likely to suggest that they will be exploring all ways to enhance shareholder value without making any specific suggestions.