Event: WFM report’s their fiscal Q3 earnings tomorrow after the close (7/31), the options market is implying about a 7% move following the results, which is shy to the 4 qtr avg of about 9.25% and basically inline with the 8 qtr avg of about 6.8%.
Sentiment: Wall Street analysts remain fairly mixed on the stock with 15 Buys, 13 Holds and 3 Sells, with an avg 12 month price target of ~$55.50, a touch below where the stock is currently trading. Short interest has recently risen to the highs of 2013 in lock step with the stock’s strong performance, but sits at a mere 2.35% of the float.
Options Open Interest: Calls outnumber Puts by a very small margin at 87k to 85k with the 5 single open line being in Aug expiration: 5700 of the Aug 57.5 puts, 5500 of the Aug 40 puts, 5400 of the Aug 43.75 calls, 5k of the Aug 55 put, and 4500 of the Aug 55 calls.
Volatility Snapshot: WFM implied vol is following its familar pattern, rising from the low 20’s to the high 30’s into the event:
The IV the last few cycles has turned out to be justified as there have been some gaps in the name on earnings. But vol quickly falls following the report and it’s not uncommon to see it get cut in half pretty quickly, meaning the direction of the move on long premium trades needs to be correct, and any ranges of short premium trades needs to account for the potential gap. Aug vol is about 44 and Sept about 30, so expect August to get cut in half and Sept to be in around 30% or more following the report.
Price Action / Technicals: WFM has been a very strong performer ytd, up 22%, and especially since its Q1 earnings mishap in Feb, that saw the stock make new 52 week lows over the ensuing months, at one point placing the stock down almost 11% on the year. The nearly 40% rally in the shares from the April lows now has the stock within 2% of the all time highs made early this month.
The 2 year chart below shows the stocks breakout above $50 on volume to new all time highs following last quarter’s earnings and guidance, this breakout level should serve as VERY healthy support on any disappointment.
Fundamentals / Valuation: Two weeks ago, GS raised their earnings estimates and price target on WFM based on what they perceive to be a strengthening high-end consumer, in large part due to firming of employment trends and rising home prices, particularly in California where WFM has 22% of their stores.
One of the fairly routine knocks against WFM by the naysayers is the fairly extreme valuation for a supermarket, the company trades at 39x trailing earnings and 32x expected 2014 earnings. While this seems aggressive in a market that trades below 15x, WFM is expected to grow earnings in the high teens % for the foreseeable future and sales in the mid-teens.
MY VIEW: Back in February the stock got punished as the company lowered their sales outlook, for what the time was a fairly common excuse, the uncertainty around payroll tax increases and whatever else we were worried about at the start of the year. As we head into the back half of 2013, most of the trends that affect the high end consumer appear to be improving on the surface, except one, $100 crude which this summer has translated to nearly $4 gas at the pump. While this does not have a huge impact on most existing customers (Prius drivers), it does affect the trade up crowd.
While this is not a stock that I could buy due to its price action and valuation, as I do think it is priced to perfection, it would be remiss not to mention the very similar set up in SBUX last week, where the company not only beat expectations, but the stock gapped to a new all time high on huge volume and has held the gains. If WFM were to put up a beat and raise would we see new highs? Most definitely, but for a stock that has a history of earnings gaps of late (both up and down) I think it is safe to say this is not a name you want to be complacent on. Look for a post where we will offer some ways to play.
Estimates from Bloomberg:
- 3Q adj. EPS. est. 37c (range 35c-38c)
- 3Q rev. est. $3.09b (range $3.05b-$3.13b)
- 3Q gross margin est. 36.0% vs 36.4% Q/q, 36.0% Y/y
- FY13 adj. EPS est. $1.45 vs co. forecast $1.43-$1.45