Event: General Electric (GE) reports Q4 results tomorrow before the open. The options market is implying about a 3.5% one day move, which is essentially in line with its one day rally post Q3 results on October 16th, but very rich to the 4 qtr avg of 1.25%, and a bit higher than the 10 year average one day move of about 2.9%.
Price Action / Technicals: GE is down 8% in 2016, basically inline with the S&P 500. Yesterday the stock bounced off of its 200 day moving average (yellow line below), and now above the $28 breakout level from October:
[caption id="attachment_60451" align="aligncenter" width="600"]
GE 1yr chart from Bloomberg[/caption]
On a bounce, a move back to the recent breakdown level at $30, also its 50 day moving average (purple line) looks like a reasonable target.
Taking a slightly longer term view, looking at the 5 year chart, a move back to the uptrend near $26 could be the spot the stock returns if they give disappointing guidance:
[caption id="attachment_60452" align="aligncenter" width="600"]
GE 5 year chart from Bloomberg[/caption]
And I have to add this chart, from the stock’s all time high in 2000, with the long term downtrend finally being broken early last year. If the broad market weakness continues, or there are any fundamental hiccups in the near future, the stock could re-test that uptrend line in the low $20s, some 20% lower:
[caption id="attachment_60453" align="aligncenter" width="600"]
GE since 1999 from Bloomberg[/caption]
Fundamentals: GE awoke from its long dirt-nap last April on news that they intended to sell $27 billion in real estate assets, and planned to transform to a pure play industrial company by shedding non-core financial assets and then use the proceeds to buy back stock. The stock re-entered a slumber until October when they reported better than expected earnings, and got approval for their spin-out of Synchrony Financial (SYF), a consumer finance company they owned 80% of. The shift to an easier to track industrial company comes at a time where most global industrial companies are in the midst of an earnings recession from weak commodity related demand, the strength of the US dollar, and weak demand from emerging markets (GE gets half its sales outside the U.S.).
GE has a dividend yield of 3.2%, well above the 10 year Treasury yield at 2%, with the potential for increased buybacks as the company sells off more financial assets Oh, and activist investor Nelson Peltz recently took a stake (here). I would add that GE’s forward P/E of about 19, is well above a market multiple and near a 10 year high.
MY VIEW: the 3.5% move in either direction seems rich, but that depends on whether or not the market has stabilized off of yesterday’s lows. If the company were to offer cautious guidance, and the SPX was down 2% tomorrow morning, then the stock could easily be down 5%. On the flip side, in a market like today with the SPX flat to up, and the company issues an inline report and guidance, with little commentary about weak overseas demand, then the stock probably moves quickly to $30. I have no directional view here, but if the company were to guide lower and offer cautious commentary then the stock would be a short on any bounce. If the stock were to have a relief rally to $30 in a stable market, then I think you fade that move.
So What’s The Trade?
To be frank in the near term we see little upside above $30, and expect that to serve as near term resistance. While weekly at the money options appear dollar cheap, they are expensive in vol terms, and I do not expect the stock to outperform the move to the upside. We see few trades if any that look interesting for an event trade. If you were looking for defined risk leverage into the print, then the Jan22md weekly 29 calls (stock ref 28.85) are OK at 30 cents, or about 1% of the stock price, that breaks-even at $29.30 up 1.5%. Not bad. We just don’t have conviction that it will move.
Bearish/ Hedge: for longs who fear a sort of INTC like move from last week, this is dollar cheap protection in a volatile market.
Buy the GE ($28.90) Jan 22nd 28.5 weekly puts for .25
Rationale – These puts break even at 28.25 and have unlimited gains below. This works well if you think there’s a chance that GE revisits its lows from yesterday that also correspond with its 200 day moving average. And since it’s a simple put purchase it is very well positioned for any break below that level.
ESTIMATES & FORECASTS From Bloomberg
- 4Q adj EPS est. 49c (range 49c-50c)
- 4Q rev. est. $35.91b (range $34.25b-$37.82b)
- 4Q segment rev. ests. (avg. of 4): Power $8.02b ; Renewable Energy $2.52b; Oil & Gas $4.71b; Energy Mgmt $2.66b; Aviation $6.32b; Healthcare $4.91b; Transportation $1.62b
- 4Q oper. profit (avg. of 4): Power $1.79b; Renewable Energy $215m; Oil & Gas $827.47m; Energy Mgmt $148.97m; Aviation $1.50b; Healthcare $954.5m; Transportation $340.2m
- 2016 adj EPS est. $1.51 (range $1.45-$1.65); GE forecast $1.45-$1.55 (Dec. 16)
- 2016 rev. est. $130.54b (range $127.04b-$136.99b)