Event: United Technologies (UTX) will report Q3 results tomorrow morning before the close. The options market is implying only a 2.5% one day move vs the 4 qtr avg of about 2%. Remember though, the stock declined 7% July 21st following their Q2 disappointment, marking its largest one day post earnings move since Oct 2008.
Price Action / Techncials: UTX is down 20% on the year, and down 26% from its 52 week and all time highs made in March. July’s gap on downgraded 2015 guidance was the stock’s largest decline since 2011, and the largest volume day since 2008. The stock has barely seen an uptick since.
On a longer term basis, looking at an 8 year chart, $80 should serve as massive technical support, and $98 should serve as decent near term technical resistance:[caption id="attachment_57786" align="aligncenter" width="600"] UTX 8 year chart from Bloomberg[/caption]
Nearer term $90 looks to be a fairly important level, and I suspect in the coming weeks the stock is back at the long term support at $80 or resistance near $100:[caption id="attachment_57787" align="aligncenter" width="600"] UTX 5 year chart from Bloomberg[/caption]
Our Take: It appears that business deteriorated quickly in the late Spring for UTX as the company guided down 2015 expectations on two instances, first on June 15th, and then again on July 20th. Analysts now expect earnings to decline 9% in 2015, on a 12% sales decline, its largest yoy sales decline in more than 10 years. UTX is fairly cheap trading 14x next year’s expected earnings growth of 7%, but I suspect continued weak demand overseas and dollar strength could put an eps increase in 2016 in jeopardy. UTX gets about 42% of its sales from outside the U.S.
A miss and another guide down and the stock very likely outperforms the implied move to the downside, back towards its recent 52 weeks lows at $85.
A beat and raise (highly unlikely) and the stock is quickly testing its late August breakdown level in the high $90s.
We don’t have a strong opinion on the results, but we suspect a relief rally will be sold, and shorts probably look to cover near $85.
Potential Trade: For those who think the stock will move one way or the other on the report, but not sure on direction, with the stock at $92, the Oct 23rd 92 straddle (call premium + put premium) is offered at $2.45, or 2.6%. That’s fairly reasonable if expecting movement. If you bought the move, and thus the at the money straddle for $2.45, you would need a move above $94.45, or below $89.55 to break-even by this Friday’s close. The worse case scenario would be no movement by the stock and options premiums would quickly come out of the options. There is a low probability though of a total loss of premium with both options having a 50% chance of being in the money on Friday’s close.
For those with a directional inclination, the individual 92 weekly calls and puts can be bought alone of course. In that scenario you obviously need to get direction right but they are dollar cheap so getting the magnitude of the move correct isn’t a stretch.