MorningWord 11/12/13: Back in May we took a look at NTAP prior to their fiscal Q4 quarterly report and concluded that the recent interest by activist investors, strong balance sheet and technical set up clearly outweighed what appeared to be weak fundamentals resulting from a poor demand environment. We played from the long side (May 21st, 2013: New Trade $NTAP – Cash Hoard & Potential Distribution Overriding Poor Fundamentals?) and had a decent trade, but have not revisited the story until now.
What originally caught our eye was the breakout above $37 to new 52 week highs and what also looked to be a fairly convincing double bottom.
Shortly after our trade the company announced a $3 billion share repurchase, a quarterly dividend and cost cuts. The stock had a very nice slow creep higher, but has sold off about 15% from the 52 week highs made in Sept, and like clockwork bounced off of the 200 day moving average last week.
So now $40 is a fairly huge technical level, right where it stopped yesterday. The company will report fiscal Q2 tomorrow night after the close, the options market is implying about a 6.5% move which is rich to its 3.5% 4 qtr avg move.
Last week on Nov. 4th Piper Jaffray downgraded NTAP to a Hold suggesting:
the relatively weak demand environment, coupled with increasing competitive headwinds, we see limited opportunity for upside to estimates going forward and would not be surprised if consensus estimates are reduced following the company’s upcoming earnings call in November 13.
NetApp gets 17% to 19% of its revenue from the U.S. federal government. But Piper argues that the government shutdown hurt spending in late September and into October. Add to that, rival EMC’s second-generation VNX unified storage platform has narrowed the competitive advantages of NetApp.
The entire sector has had issues over the past year, due both to increased competition and subdued government spending. However, NTAP’s expected earnings growth is higher than most of its peers, and continued activist involvement likely limits the downside in the near term. While we might stay away for earnings, if the stock acts weak after the report, we’re on the lookout for bullish structures with the right maturity and strike parameters to take advantage of a bounce into year end from an important technical area.