$HPQ Fiscal Q4 Earnings Cheat Sheet

by Enis November 25, 2014 12:15 pm • Commentary

Event:  HPQ reports its fiscal Q4 earnings today after the close.  The options market is implying about a 3.5% one day move, which is quite a bit alower than the 4 qtr avg of about 5.5% and the 8 qtr avg of about 9.5%.  Of course, HPQ’s market cap today is much higher than it was for much of the past two years.

Sentiment:  Wall Street analysts are mixed on HPQ, with 18 buys, 16 holds, and 2 sells, with an average 12 month price target of around $41.  A year ago, there were only 8 buys on the stock.  Short interest is only around 1.5% of the float, near a 2 year low.  The stock is one of the best performers among large caps in 2014, up 35% year-to-date.

Options Open Interest:  Total open interest favors puts over calls by a ratio of 1.1 to 1, despite the overall strength in HPQ over the past year.  Recent volume has favored calls, as the one month call/put ratio is around 1.8 to 1.

The weekly 37 calls and the Dec20th 37 calls both have over 10k of open interest.  The Jan15 35 call and put lines both have over 10k of open interest as well.  In Jan16 expiration, the 30 put line has over 10k of open interest.

Price Action / Technicals:  The weekly chart in HPQ shows a tale of two trends – first, the steep downtrend from April 2010 to November 2012, and then the uptrend which still remains in tact:

HPQ weekly chart, 50 week moving average in pink, courtesy of Bloomberg
HPQ weekly chart, 50 week moving average in pink, courtesy of Bloomberg

The $38-$40 area is potential resistance, while the rising 50 week moving average, now around $33, is the long-term support.

Zooming into the daily chart, HPQ has stalled just below its Sept high of $38.25 ahead of today’s report:

HPQ daily chart, courtesy of Bloomberg
HPQ daily chart, courtesy of Bloomberg

Holding above that level after earnings would be a major technical positive for the shares going forward.

Volatility:  Implied volatility in HPQ has steadily moved lower as the stock has rallied over the past 2 years:

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

The implied move of 3.5% is much lower than the average of the past 1 or 2 years, but that’s partly because HPQ now sports a significantly larger market capitalization.  In any case, implied volatility is likely to near a 2 year low after the event.

Our View:  HPQ’s rally over the last 2 years has been more about stabilization than growth.  Given the depressed valuation, that was enough to lead to the massive rally.  More recently, the spin-off of the printer and PC business was announced in early October, and management might give more details in this evening’s call.

The stock still looks relatively cheap compared to the broader market, though that’s a reflection of investor concerns about achieving the annual EPS growth target of around 5% over the next couple of years.  HPQ is at an important technical spot near $40, with implied volatility low.  We don’t have a strong view on the name here, but 3-6 month options look cheap based on the increased headline risk in the new year.