Name That Trade – $MRVL At Your Surroundings

by CC August 19, 2015 12:51 pm • Commentary

Back in the spring when M&A in the semiconductor space was all the rage with the largest deal in tech history, Avago paying $37 billion for Broadcom (BRCM) and Intel’s (INTC) $17 billion cash bid for Altera (ALTR), investors were frantically trying to figure out who was gonna be next. One stock that came up frequently as a potential target was Marvell (MRVL), a competitor to BRCM in mobile communication chips.

MRVL has been a slow moving trainwreck since its 52 week highs in late February, now down 30% from those levels, and down 18% on the year, and very near a new 52 week low after today making a new 2015 low. The three year chart below shows what an important technical support level $12 is, with little support for another 10%:

MRVL 3yr chart from Bloomberg
MRVL 3yr chart from Bloomberg

Event:  The company is scheduled to report Q2 results after the close tomorrow, and the options market is implying about a 7% one day move (with the stock at $12 the Aug 12 straddle is offered at 85 cents, if you bought that and thus the move you would need a move below $11.15 or above $12.85 to make money by Friday’s close.  The 4 qtr average move has been only about 4%.  

Our View: On their last call in May, that disappointed, and saw the stock decline 8.5% the next day, also saw the resignation of their CFO.  It would appear that MRVL’s house is less than in order at a very challenged time for component suppliers in the PC and smartphone supply chain.  The stock is not exactly cheap when you consider the expected earnings and sales decline in the current fiscal year, but with its current market cap of $6.2 billion, and $2.5 billion in cash, and no debt, there are a lot of possibilities on the m&a front, both as an acquirer, or an acquired. They can also dramatically up-size their current dividend that yields 2% and their existing share buyback.

We suspect that tomorrow’s results will be disappointing and not likely to be be coupled with any m&a news in this market environment.  Despite the stock’s weakness ytd, it still appears vulnerable. We would also add that ADI (that we previewed yesterday here) had a beat and raise and the stock was up 7% in the post market last night, but is now unchanged on the day.  It feels like we are in an environment for tech stocks where only stellar news is being rewarded and mild negative to bad news is being punished.

Options: A move to 11 or to 13 seems entirely possible and with the August ATM straddle pricing a move just under that it seems reasonable. But that means on a directional basis spreads like the 12/11 put spread for .35 and the 12/13 call spread for around .30 offer the best bang for the buck on the event itself.