Earnings Preview $TWX: Go Now?

by Dan February 9, 2016 2:52 pm • Commentary• Trade Ideas

Event: Time Warner (TWX) will report Q4 results tomorrow before the open. The options market is implying a 6.5% one day move, which is rich to its 4 qtr average one day move of 4.25% and 10 year average one day of 2.6%. I would add that the stock has declined the day following the last two reports, 6.6% on November 4th and 8.96% on August 5th.

Price Action / Technicals: including today’s 5% decline, the stock has shown great relative out-performance to the broad market and most peers, down only 1% in 2016.  That being said, the stock is down 30% from its all time highs made in July 0f 2015.

A quick gander at the one year chart offers the illusion that the stock is at near term support, after its September bounce at $65, then the early January bounce from just below $65, and now today’s test of the 52 week lows:

TWX 1yr chart from Bloomberg
TWX 1yr chart from Bloomberg

But looking at the 6 year chart shows last year’s obvious break of the uptrend that had been in place from the 2012 lows, and what has been a series of lower highs and lower lows:

TWX 6 year chart from Bloomberg
TWX 6 year chart from Bloomberg

The stock seems destined for whatever support exists around $60, but it’s important to note that there is an air-pocket below.  The technical set up is less than stellar.

Valuation: TWX is cheap if you believe 2016 consensus eps estimates calling for 12% growth, on 5% sales growth, with the stock trading at 12x, 12% expected growth, not bad.

My View:  If the stock were to get creamed on disappointing 2016 guidance, trading in the mid $50s, I would think this price action would cause activists (read here) to reveal broader intentions to push the company to unlock value by spinning out HBO.  TWX is a cheap company with great assets, and while the company successfully warded off a $73 billion FOX takeover back in 2014, the company’s $50 billion market cap, could make it an attractive takeover from a U.S. telco, cable company or maybe even Apple, all of whom have been mentioned of late.

So what’s the Trade?

I see little reason to get involved on the long side prior to the print, but if you thought the stock could bounce this week in line with the implied move, you might want to consider call butterflies to help mitigate an expected post earnings vol crush:

Hypothetical Trade:  TWX ($64) Buy the Feb 12th weekly 65/70/75 Call Butterfly for ~$1

Break-Even on Feb 12th weekly Expiration:

Profits: up to $4 between $66 and $74, with max gain $4 at $70

Losses: of up to $1 between $65 and $66, and between $74 and $75, with max loss of $1, or 1.5% of the underlying stock price below $65 and above $75.

Rationale: To be clear, this is not a take-over trade, but its not a bad risk reward near term if playing for a relief bounce post results.  I’ll offer our usual disclaimer about long premium directional trades into events, you need to get a lot of things right to just break-even, timing, direction and magnitude of the move.

But given the weakness in the space (VIA is down 14% today after disappointing results) for those looking to play from the long side, defined risk near term makes sense.