$BA Q4 Earnings Cheat Sheet

by Enis January 28, 2014 7:33 am • Commentary

Event:  BA reports its Q4 earnings tomorrow before the open.  The options market is implying about a 3.5% one day move, which is above both the 4 qtr average of about 2.5%, and the 8 quarter average of about 2.25%.

Sentiment:  Wall Street analysts have been quite positive on BA, with 22 buys, 8 holds and no sells on the stock, with an average 12 month price target of around $157.  Short interest sits at a negligible 1% of the float.  The stock has almost doubled over the past year, up 89% in that period, quite a move for a company that was around a $55 billion market cap last year, and more than $100 billion today.

Options Open Interest:  Open interest in BA is skewed to puts versus calls, by a ratio of about 1.3 to 1.  The main reason for this skew is because BA has been such a strong stock over the last year, so traders have taken off call positions as the stock has risen, but many far out-of-the-money put options remain open, though not relevant.  The 1 month average options volumes have favored calls, by a ratio of about 1.2 to 1.  The following strikes have over 5k of open interest:

-Feb22nd 135 calls

-Feb22nd 140 calls

-Feb22nd 145 calls

-May 120 puts

-Aug 130 puts (over 20k, most of any strike, almost all opened in the past 2 weeks)

Price Action / Technicals:  BA’s move higher over the last year really accelerated when the stock broke its prior all-time high set back in 2007 at $107.83 (marked in red):

BA monthly chart, Courtesy of Bloomberg
BA monthly chart, Courtesy of Bloomberg

What looks like a parabolic move on the monthly time frame looks much more like a steady uptrend on the daily timeframe, though that’s mainly because of the compressed range.  BA touched its 50 day moving average for the first time since September, and the 50 day ma has served as support for the entirety of the past year:

BA daily, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
BA daily, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

The 200 day moving average is all the way down at around $115, almost 20% from current prices.  However, BA’s inability to hold its breakout above its November high (at $142) does put the viability of the uptrend in the near-term in question.  $130 is the first level of support after the 50 day ma, and 144.57 was the all-time high set last week.

Volatility:  Implied volatility in BA spiked higher after the stock declined more than 2% on Thursday and another 3% on Friday.  Those were the largest one day moves for the stock since November, and implied volatility is now in the high-20s ahead of the earnings event:

30 day implied volatility in BA, Courtesy of LiveVolPro
30 day implied volatility in BA, Courtesy of LiveVolPro

Earnings has historically not been a large source of volatility for BA.  Rather, over the last year, the main reason for volatility in BA shares has been problems and groundings in Boeing 787 flights due to battery and other technical issues.  Investors have shrugged off those concerns on numerous occasions.  The biggest risk to the shares is likely global growth and the stock’s own lofty valuation, rather than news specific to BA.

Our View:  BA has been a major beneficiary of a positive backdrop for the global airline industry, amid secular growth in air travel and limited competition for airplane manufacturing.  That growth has boosted the stock’s valuation to a 25 P/E, the highest level since 2010.  The stock has grown earnings 15-25% per year over the past 3 years, and analysts expect about 10-12% earnings growth over the next 2 years.

With that rich valuation (especially for a $100 billion industrial company), BA must execute above expectations, or the stock is likely to feel the wrath of disappointed growth investors.  So far, concerns about international growth have not impacted BA, even though it gets more than half of its revenues from outside the U.S.  But guidance for 2014 earnings will be crucial on the call.

Technically, the stock held its 50 day ma yesterday, and the near-term pivot level is likely the $136.49 closing level on December 2013.  BA has moved higher on 8 of the last 10 earnings reports.  In the case of a positive reaction on a tepid number, we might look to fade the strength if the stock makes it up to near resistance in the 142-145 area.  For now, we’ll probably stay away from any trades before the earnings release.