$BA Q3 Earnings Cheat Sheet

by Enis October 21, 2014 12:22 pm • Commentary

Event:  BA reports Q3 earnings tomorrow, Oct 22nd, before the open  The options market is implying about a 2.5% one day move, which is below both the 4 qtr avg move of 3.75%, and the 8 qtr avg of about 3.25%.

Sentiment:  Wall Street analysts are positive on BA, with 19 buys, 11 holds, and 1 sell, and an average 12 month price target of around $154.  The stock has lagged throughout 2014, and is down 7% year-to-date.  Short interest is around 2%, still relatively low, but higher than at any point in the past year.

Options Open Interest:  Total open interest is skewed towards puts over calls by a ratio of 1.3 to 1.  However, the 1 month activity has been slightly skewed towards calls by a ratio of 1.2 to 1.  Not surprisingly, the bulk of the open interest in short-term options is at the 120, 125, and 130 strikes, with no large imbalance even farther out in maturity.

Price Action / Technicals:  BA had a monster 2013, breaking out to a new all-time high in convincing fashion.  However, the price action in 2014 suggests that the stock got ahead of itself last year, and much of this year has been spent consolidating last year’s breakout:

BA daily chart, 200 day ma in yellow, courtesy of Bloomberg
BA daily chart, 200 day ma in yellow, courtesy of Bloomberg

The stock has found support near the $120 level (marked in red) on multiple occasions in the past year.On the upside, the declining 200 day moving average is now around $128.50, and it has acted as resistance ever since the uptrend was broken in late June.

Volatility:  After implied volatility in BA hit a 1 year high last week on the broader market weakness, it is now back near the 20 level, where it was prior to the last 2 earnings reports:

BA 30 day implied volatility, courtesy of Bloomberg
BA 30 day implied volatility, courtesy of Bloomberg

Given the recent volatility, we’d be surprised to see 30 day implied volatility fall below the high teens after the report, so options pricing here looks on the cheap side, especially 1-3 months out.

Our View:  We have not liked BA on a fundamental basis for the past year.  The stock’s consolidation since then has made the valuation more reasonable, as BA now trades at a P/E of around 16x, vs. expected EPS growth of 5-10% over the next 2 years.  However, the cyclical nature of the aircraft business, and the stagnation in the defense segment makes us skeptical that those estimates are so easily achievable.  Technically, BA has remained in the $120-$130 range for much of the past 6 months.  Given the cheap valuation vs. the poor business mix, we are relatively neutral as well.  Options pricing will be quite cheap after earnings tomorrow, which could be an opportunity to buy premium for those with a directional view.