$UA Q3 Earnings Cheat Sheet

by Enis October 22, 2014 11:30 am • Commentary

Event:  UA reports Q3 earnings tomorrow before the open.  The options market is implying about a 8.5% one day move, which is below both the 4 qtr avg move of 12.5%, and below the 8 qtr avg move of 9.5%.

Sentiment:  Wall Street analysts are neutral on UA, with 13 buys, 17 holds, and 4 sells, with an average 12 month price target of around $70.50.  That lack of enthusiasm is surprising for a stock that has risen 55% year-to-date.  Short interest in UA is near a 3 year low, at around 8% of the float.

Options Open Interest:  For a $14 billion market cap, widely known apparel stock, UA options are not particularly active.  In fact, bid offer is quite wide, making options trading much less appealing.  Most of the open interest is in Jan15, where it is evenly distributed among strikes.  The Jan15 65 put and 75 call lines have the most open interest at around 4k.

Price Action / Technicals:  UA has held its rising 200 day moving average throughout the past year, and bounced at the crucial $60 support level last week:

YELP daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg
YELP daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg

On the upside, the all-time high is $73.42 from September.  The rising 200 day moving average is around $58, just below the $60 support level, so it would likely take an awful report to see the stock hold below there tomorrow.  It’s worth noting that the last earnings report saw a daily range of $65.50 to $70.25, an important value area since then.

Volatility:  30 day implied volatility in UA nearly touched a 2 year high last week:

30 day implied volatility in UA, courtesy of Bloomberg
30 day implied volatility in UA, courtesy of Bloomberg

While it is still in the high 40’s heading into the earnings report, that’s close to the 45 level prior to July earnings, so volatility has normalized for the most part.  Implied volatility is likely to move back to the mid-30’s after the event.

Our View:  We’ve only traded UA on one occasion on the site, for a gain on a call calendar in late April.  We wish we had just bought the stock back then, as it’s up about 50% since that low.

Analysts don’t love UA because of the expensive valuation (P/E of 71x 2014 earnings), but growth investors have remained committed to it based on the expectation of continued 30%+ EPS growth going forward.  Expectations are high, but the company has generally delivered over the past couple of years.  With implied volatility fair and options wide, this is a name that we would only look to trade when vol or the stock gets to an extreme level.