Event: CTAS (supplier of uniforms and other office equipment and apparel, both sale and rental solely in North America), will report their fiscal Q1 earnings tonight after the bell.
The options market is implying about a 3.7% move post earnings, which is rich to the 4 qtr avg of ~2.55% and the 8 qtr avg of ~3.4%. It is interesting to note that 7 of the last 8 post earnings moves have been lower with an avg move of about 2.6%, with the one move higher over the last 2 years being up 9.3% when they reported a better than expected fiscal 2Q12 results back in Dec 2011.
Sentiment: The Wall Street analyst community is fairly mixed on the stock with 5 buys, 9 holds and 1 sell, with an avg 12 month price target of $48.17, or 5.5% below where the stock is currently trading. Short interest sits near 52 week highs at almost 6% of the float.
Vol Snapshot: Heading into tonight’s print implied vol (blue line) is elevated to about the levels it has been over the last year prior to earnings, while realized vol (white) is approaching 52 week lows. Following results, IV should come in to the mid teens, which is a few points higher than the 90 day realized vol.[caption id="attachment_30451" align="aligncenter" width="589"] CTAS 30 day at the money IV vs realized vol from Bloomberg[/caption]
Options Open Interest: Here is the kicker, the options trade by appointment, which could offer opportunity or peril depending upon how you look at it. There is a total of 10,649 open interest in the stock (6800 calls to 3700 puts) , with only 800 options trading today. The largest single lines are 1200 Jan 50 calls and 1100 Sept 47.5 puts.
Technicals & Price Action: The stock is up 24.5% ytd and up 6% this month alone, just this week making new 9.5 year highs. The stock is a tad extended.[caption id="attachment_30454" align="aligncenter" width="589"] CTAS 10yr chart from Bloomberg[/caption]
On a more near term basis, the one year chart is interesting, looking below at the circles over the last 3 earnings prints, the stock in all occasions has traded back to our through the 50 day moving average (purple line) on the downside.[caption id="attachment_30461" align="aligncenter" width="589"] CTAS 1yr chart from Bloomberg[/caption]
As a trader, with the stock just below 10 year highs, it has hard not to look for a way to play for a quick move after tonight’s print for the stock to test the 50 day at ~$48.50
Fundamentals: The stock has clearly benefited from the perceived recovery in unemployment, but while that number ticks down, we are only averaging 160k jobs being added monthly which by historical standards remains very low and does not speak to a booming recovery. CTAS has 37% of the domestic uniform services market share, and given the difficulty in the labor market over the last few years, the company has faced margin pressure as a result of lack of organic growth and pricing pressures.
The stock is not cheap relative to its expected growth, trading at ~19x expected fiscal 2014 earnings that analysts see growing only 8%, and 11% next.
My View: If I were just thinking about the stock, I would suggest that the price action in the face of what has been a string of earnings disappointments is downright confounding, especially when you consider the Fed’s most recent assessment of the health of our economic recovery. The stock on its own though could be a dangerous short as it could be a pure play on any uptick in jobs gains, and the sentiment seems to be in that camp.
Why does this stock fall into the “Adult Swim” category? Well, if you were to play with options, the lack of liquidity could make the trade a sort of “Hotel California” trade where you can get checked out but never leave if you happen to be wrong.
TRADE: CTAS ($50.80) Buy Oct 50/47.50 Put Spread for .60
-Buy 1 Oct 50 Put for .85
-Sell 1 Oct 47.50 Put at .25
Break-Even on Oct Expiration:
Profits: Btwn 49.40 and 47.50 make up to 1.90, max gain of 1.90 at 47.50 or lower
Losses: Btwn 49.40 and 50 lose up to .60, above 50 lose full .60
Trade Rationale: The set up seems ripe for a move back to the 50 day as the stock is extended and the valuation appearing stretched. BUT THIS IS A FAIRLY BINARY TRADE AND ONE WHERE THE OPTIONS ARE WIDE AND THIN, SO THIS WILL BE A SMALL TRADE, RISKING WHAT I AM WILLING TO LOSE. WE DO OUR BEST TO AVOID EARNINGS PLAYS, THIS ONE LINES UP FAIRLY WELL DESPITE LIQUIDITY ISSUES.