Event: TIF reports its Q3 earnings tomorrow before the open. The options market is implying about a 6% one day move, which is well above the 4 qtr avg of about 3.25%, and also above the 8 qtr avg of about 5.5%.
Sentiment: Wall Street analysts are somewhat negative on the stock, with only 10 buys, 14 holds, and 4 sells, with the average 12 month price target right around $85. Short interest has declined to a multi-year low, around 3% of float, from over 10% of the float as recently as March 2013. The stock is up 41% in 2013.
Options Open Interest: Open interest is just about evenly split between calls and puts, mainly due to heavy weekly call volume last week, with the Nov29th 86 calls trading over 10k (prior to last week, open interest was heavily skewed towards puts). Those weekly 86 calls are the only strike near the current stock price that has over 10k of open interest (for any maturity).
Price Action / Technicals: TIF has not been able to break above its July 2011 all-time high of $84.49. The stock has been rejected in the 80-84 area on 3 separate occasions in 2013:
[caption id="attachment_32963" align="alignnone" width="600"]
TIF weekly chart, Courtesy of Bloomberg[/caption]
Against that $83.5-$84.5 crucial resistance area, the stock has found support in late October near the rising 200 day moving average, which now comes into play around $75.50:
[caption id="attachment_32965" align="alignnone" width="600"]
TIF daily chart, 200 day ma in black, Courtesy of Bloomberg[/caption]
Given the number of times that upside resistance has been tested, resistance is likely weaker today than it was earlier in the year. The potential for a breakout on a strong earnings report is high. On a weak report, downside is likely limited to the 75-76 area.
Volatility: Implied volatility in TIF is close to where it has been prior to previous earnings reports in 2013:
[caption id="attachment_32966" align="alignnone" width="600"]
TIF 30 day implied volatility (red) vs. 30 day realized volatility (blue), Courtesy of LiveVolPro[/caption]
However, realized volatility over the past 3 months has been unusually low. The implied move for earnings of above 6% is quite elevated, but options prices anticipate much lower realized volatility (low 20’s) after the event.
Our View: TIF has rebounded strongly after earnings contraction in 2012 due to weak Asian demand. The company is expected to grow earnings 10-15% over the next 3 years, and trades at a 23x P/E multiple. Relatively fair, all things considered.
With valuation fair, it will be execution and actual results that are likely to drive the stock. The stock sits just below its all-time high of $84.49 set in 2011, and that’s the pivotal level to watch on the upside. Meanwhile, the stock has traded between $70 and $84 for more than 6 months, so a weak report likely sends the stock back into that range.