Chart of the Day – $NTAP Dat

by Dan March 19, 2014 12:36 pm • Commentary

Last year NTAP was in the sights of activists looking for greater capital return to shareholders.  In May, in conjunction with  the company’s Fiscal Q4 report, NTAP announced an increased buyback and initiated a dividend running ahead of activist’s official requests:

The Company plans to complete the aggregate $3 billion program over the next 3 years. NetApp intends $2 billion of repurchases to be completed within the next 12 months, of which $1 billion is planned to be completed during the next 4 months.

NetApp has initiated a quarterly cash dividend of $0.15 per share of the Company’s common stock, which it intends to increase over time.

Since the time of this announcement on May 21st 2013 (circled below), the stock is in about the same spot, vs the S&P 500 which is up about 20% in that time period:

[caption id="attachment_37723" align="aligncenter" width="589"]NTAP 1yr chart vs SPX from Bloomberg NTAP 1yr chart vs SPX from Bloomberg[/caption]

That’s some fairly serious under-performance for a company that is expected to grow earnings about 10% in calendar year 2014.  I guess the issue is lack of sales growth, which is in the low single digits.

With the company expected to report fiscal Q4 earnings on May 21st, I suspect activists may turn up the noise on the company.  NTAP is sitting on net cash equal to 33% of its $12.3 billion market cap.

The two year chart below shows the importance of the $35 support level on the downside (green), while $40 could serve as intermediate term resistance (red):

[caption id="attachment_37724" align="aligncenter" width="589"]NTAP 2yr chart from Bloomberg NTAP 2yr chart from Bloomberg[/caption]

The stock is approaching bear market territory, down about 19% from the January high of $46, so the stock feels like it is approaching an inflection point.  A beat and raise quarter followed by an increase in share repurchase and dividend could cause the stock to break above $40 and establish a new range between that and the prior highs, while a miss and guide down could easily cause a retest of the prior support in the $36/34 range.

Despite the increasingly oversold nature of the stock, options on NTAP are fairly cheap, approaching 2 year lows.  I would expect that they don’t get too much lower over the next few weeks as the company is expected to speak at two brokerage conferences on April 2nd and then its earnings results in May:

[caption id="attachment_37725" align="aligncenter" width="589"]NTAP 2 year chart of 30 day at the money Implied Vol from Bloomberg NTAP 2 year chart of 30 day at the money Implied Vol from Bloomberg[/caption]

NTAP’s cheap valuation, activist involvement, and cheap options pricing could present an opportunity for a trade over the next few weeks.  For now, we wanted to flag the overall situation, but if and when we pull the trigger, we’ll be sure to post it as a new trade for the site.