Name That Trade(s) – $UPS: Tracking Number

by Dan February 2, 2015 12:55 pm • Commentary

On January 23rd UPS pre-announced weak Q4 results (read 8K here):

 “primarily due to the underperformance of the U.S. Domestic segment”

and suggested that 2015 results would be slight below prior guidance as

“increased pension expense of approximately $180 million due to lower discount rates, and currency headwinds of more than $50 million will negatively impact results. The company now anticipates 2015 diluted earnings per share growth to be slightly less than its long-term target of 9%-to-13%.”

The stock declined 10% following the news on massive volume, but importantly from a new all time high close the prior day:

UPS 1yr chart from Bloomberg
UPS 1yr chart from Bloomberg

The stock just below $100 is about 4.5% from the lows made in October, and 15% from the recent all time highs.  $95 looks like decent near term technical support and while the stock appears to be oversold, $95 would be a fairly ideal spot to make a conrtrarian long entry.  $105 on the upside, the level that the stock gapped to following the pre-announcement should serve as fairly healthy neat term technical resistance.  So I see a range of $95 to $105 with the stock almost right in the middle.  

Tomorrow UPS will release their official Q4 results and offer more specific 2015 guidance.  The options market is not implying much movement, at only about 2.5% for the week, which makes sense given how much we already know. But I would add for those who have a directional view, weekly options appear dollar cheap. For instance if you thought that forward guidance was not going to be as bad as some expect, and that maybe there is some commentary about increased buybacks, and you thought the stock could rally after the call, then with the stock at $99.50, the Feb6th weekly 100 calls offered at $1.15 look fairly reasonable.

And for those that think the stock could be range-bound between $95 and $105, the Feb 95/100/105 call fly at 2.15 seems like a decent risk reward. Obviously, a big move either way puts the entire amount at risk so if you wanted to lean directionally one way or the other those strikes can be adjusted in either direction with the center set at whatever you think the most likely outcome of the move is.