Event: INTC reports its Q4 earnings tonight after the close. The options market is implying about a 4% one day move, which is above both the 4 qtr avg of about 2.9% and the 8 qtr avg of about 2.75%.
Sentiment: Wall Street analysts are far from positive on the stock, with 21 Buys, 22 Holds and 7 Sells, with an average 12 month price target of around $25.50. The stock’s short interest stands at 4.3% of its float (up from about 3.5% a year ago), down from about 5% of float before last quarter’s report, but still near its highest level in many years, and quite high for a $130 billion market cap stock.
Options Open Interest: Open interest is slightly skewed towards calls, by a ratio of 1.1 to 1. Recent activity has been skewed towards calls as well, with a one month average call to put ratio of 1.5 to 1. The Jan18th 25 strike calls and puts both have over 100k open interest, as does the Jan18th 26 strike calls. The Jan15 25 calls also have almost 100k of open interest.
Yesterday there was a seller to open of the Jan (Friday expiration) 26.50 puts, with 25,000 sold at .33 in them morning, and then later in the afternoon with the stock was lower, another 15,000 were sold at .47.
Price Action / Technicals: INTC stock is trading at nearly the same place it was 10 years ago:
The stock’s high in that period was the May 2012 high of just over $29 (red line). However, on the shorter-term daily time frame, INTC broke above key resistance at $26 on Tuesday, and has been in a steady uptrend for the past year:
$26 was the high from June 2013, and sets up today as important support for the earnings number after this week’s breakout. Meanwhile, no major upside resistance exists for INTC until the 2012 high around $29.
Fundamentals/Valuation: The other day JPM upgraded shares to a BUY suggesting that INTC’s push into the Foundry business (making chips for other chip-makers) offers a substantial revenue opportunity in the next couple years. Our sense is that this move into manufacturing will be at a lower margin than what the company sells its own chips at and could pressure earnings in the near term.
On the PC front, it appears that sentiment has gotten a bit better as it relates to stabilization in the market. My sense is that this could have just been seasonal, and that expectations might be a tad high for a continuation into 2014 as secular trends towards the cloud and mobile will define enterprise and consumer computing.
Despite the stock’s recent strength, bulls point to the company’s monster share repurchase program, 3.4% dividend yield and rock solid balance sheet to buoy the stock as a new CEO sets his own course, hopefully with an eye towards re-accelerating earnings growth.
After two years of double digit % earnings declines analysts expect earnings to ONLY decline 1% in 2014, with sales growth up 1% year over year. The stock is trading at 14x this year’s expected earnings, which is not exactly expensive relative to the market or its own history.
Volatility: Implied volatility in INTC is lower ahead of tomorrow’s earnings release relative to the level of vol prior to the last 3 releases:
That’s mainly due to the fact that INTC has not moved much on the past 3 earnings reports, so traders have ratcheted down their earnings volatility expectations. Implied volatility is likely to fall back into the high teens after the report.
The low implied volatility into tonight’s print creates few opportunities to sell options against long stock to generate yield. But for those who think the recent move in the stock has created unrealistic expectations and would like short term protection, the Jan (Friday expiration) 26 puts at $0.34 (stock reference $26.40) are an OK disaster hedge from a premium standpoint.
What does that mean? If you thought there was a chance that the stock could be down 10% on a miss and a guide down, then finding a low premium hedge to mitigate some of that risk could make sense. But in this scenario that $0.34 (or a little more than 1% of the underlying stock price) only gets you one-day protection down 3%, basically in line with the implied move, so it’s not an obvious protective buy unless you are really worried.
We would not be inclined to get in on the long side as the stock’s recent move and the recent upgrade to sentiment suggest that expectations are high into the number. If you like the defensive nature of the stock’s yield and support from its buyback, then it would be our sense to wait for a better entry below $25, back near the 50 day moving average which would be the logical next stop on a disappointment.