New Trade: Messin’ with $TXN

by Dan June 19, 2013 10:56 am • Commentary

Last Monday TXN held their Q2 mid quarter update (release here) where the company tightened their previous guidance range to:

  • Revenue: $2.99 — 3.11 billion compared with the prior range of $2.93 — 3.17 billion
  • EPS: $0.39 — 0.43 compared with the prior range of $0.37 — 0.45.

While they tightened the range, they left the mid point essentially the same for both sales and earnings (inline with consensus), yet it was their commentary on their conference call that caused the stock to sell off 5% in the 2 days following the call.  Not unexpected, the company spoke to weakening demand in computing and wireless, but decent demand from the industrial sector and automotive.  The company even mentioned that their communication infrastructure vertical was seeing some growth quarter over quarter and that they were starting to see a mild pick up in China.  All in all didn’t seem like a disaster, but investors used the PC/wireless weakness to sell.  

Since last week’s dive the stock has since recovered most of the losses and could be at a vulnerable spot as investors will quickly focus on what should be a late July Q2 report where Q3 guidance will be the focus.  My sense is that Q2 will come in line to the range they just gave, very likely close to the mid point, but we could see a reset to the second half expectations.

TXN is up nearly 18% ytd, despite Wall Street analyst expecting earnings to decline 6% year over year (marking the 3rd straight annual decline), while sales are expected to decline 5% (again the 3rd consecutive decline).  Much like INTC, the company’s 3% dividend yield, $5 billion share repurchase and strong balance sheet has helped buoy the shares this year.  But on a relative valuation basis, TXN trading at 17x next years earnings, vs INTC trading at 12.5x 2014 earnings, and QCOM at 13x, I know what I’d rather own, the latter (read current positioning on QCOM here, long July/Aug 65 Call Spread).

Given that bias to look to have long exposure in QCOM into their Q2 report in late July, and my inclination to set up short TXN into their late July Q2 report, I want to essentially do the opposite trade for TXN that I have on in QCOM.

Trade: TXN ($36.17) Bought the July / Oct 34 Put Spread for .90

-Sold 1 July 34 Put at .27

-Bought 1 Oct 34 Put for 1.17


The ideal spot for this stock at July expiration is 34, at which point the short July 34 put will be at zero and the Oct 34 put will still be bid. Before then the structure is slightly bearish with 34 still acting as the ideal spot, but even without much movement the structure will benefit from July decaying at a faster rate and October IV hopefully staying bid due to the fact that it catches earnings  The worst case scenario in the near-term is that the stock immediately rallies far above the 34 strike.

Payout Diagram:

[caption id="attachment_27263" align="aligncenter" width="560"]Screen Shot 2013-06-19 at 8.51.25 AM from TradeMonster[/caption]

Trade Rationale:  We chose the 34 strike for the calendar because it is near the midpoint of the stock’s price action in 2013 (red line at 34):

[caption id="attachment_27259" align="alignnone" width="640"]TXN 1 year daily chart, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg TXN 1 year daily chart, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg[/caption]

The 34 level is also almost halfway between the 50 day ma around 36 and the 200 day ma around 32.50.  It’s an area where a lot of trading has occurred this year, and a level that might act as a magnet on any weakness in TXN.