$MMM Go Nuts

by Dan April 25, 2016 1:51 pm • Commentary• Trade Ideas

Event: tomorrow before the open 3M (MMM) reports Q1 results, the options market is implying about a $5.25 move in either direction, or about 3%.  The average move one day post earnings over the last 4 quarters has been about 4%, but basically in line with the 10 year average.

Price Action and Technicals: MMM’s nearly 12% year to date, and 25% gains off of the February lows massively outperforms that of the S&P 500 (SPX), up 2% and 15% respectively.

The one year chart below is quite fascinating when you consider the stock was recently rejected at the prior all time high at $170, and that the 200 day moving average of the stock is almost to the dime at the midpoint of the 1 year range at $152.75:

[caption id="attachment_63102" align="aligncenter" width="600"]MMM 1yr chart from Bloomberg MMM 1yr chart from Bloomberg[/caption]

Taking a view since the stock’s lows in early 2009, the uptrend has held like a boss, yielding 310% gains, 1.5x that of the SPX:

[caption id="attachment_63105" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

Quick Fundamental Take:  In 2015, $12 billion, or 40% of their sales came from the United States, so their 60% revenue exposure outside the U.S. in Q1, should certainly benefit from the nearly 5% decline of the U.S. dollar index (DXY) since the start of the year, and 4% decline year over year. But, this benefit might be offset by the adverse affect of the sharp bounce in industrial commodities like oil which has risen by 65% from its February lows, despite still being down 30% from its 52 week highs made last May.

Valuation, Expected Growth & Capital Return: MMM trades about 20x expected 2016 eps growth of 7%, and 3.3x 2016 sales that are expected to be flat year over year. While MMM is not cheap for its expected growth, the company’s commitment to capital return, $10 billion share buyback and dividend raise (current yield 2.65%), both announced in early February have helped sentiment off of the February lows and helped the stock recently make a new all time high.

So what’s the trade? [private]

If I were inclined to play for a pull-back I might consider the April 29th weekly 167.50 / 160 1×2 put spread for $1.30 (stock reference $168.10).  This trade breaks-even at $166.20, with a max gain of $6.20 on Friday’s close if the stock were to re-trace to the late March breakout level. The payout trails off between 160 and 153.80, with losses below.  The worst case scenario though is being put 100 shares for everyone of the second put short in the ratio, but again, the profits from the put spread on a one up basis act as a buffer. This is a fairly advanced strategy, and should only be done by traders who understand the implications of being naked short a put.

Another way to play for a pullback (and also a decent hedge trade for longs), and probably the strategy I would be inclined to trade given the defined risk nature, is to target $155 with a put butterfly in May. The May 170/155/140 put fly is about 3.70, has a break-even at 166.30 and a max gain of 11.30 at $155.

We don’t have a strong bias, but in the last week watching stock’s like Coca-Cola (KO), Alphabet (GOOGL) and Microsoft (MSFT) fail post earnings back near prior highs makes fading these sorts of set ups kind of attractive.