Shares of NetApp (NTAP) opened up about 4% this morning (they have since given back half the initial gains) possibly on speculation that the company could find itself in the sights of Hewlett Packard Enterprises (HPE), who last night announced they will be spinning out their Services division in tax free transaction that will result in considerable value to HPE shareholders, per Bloomberg:
The transaction will consist of a tax-free spinoff of the HP Enterprise unit and merger with CSC. The $8.5 billion value of the deal for HP Enterprise shareholders includes $4.5 billion in stock in the newly combined company, a $1.5 billion cash dividend, and the $2.5 billion transfer of debt and other liabilities.
This transaction will take some time to complete, but investors are already speculating who can be on HPE’s shopping list. NTAP has long been rumored to be a take-over candidate from large enterprise hardware vendors like CSCO, HPQ & IBM, and since last year’s fairly complicated deal announcement of DELL buying EMC/VMW the rationale only makes more sense. There is on big problem for NTAP though, their sales have been declining over the last few years, this year expected to be $1 billion or about 16% below their 2013 peak, with earnings down about 23% from their 2014 peak. But the stock is cheap, trading 11x expected fiscal 2017 eps, and only 1.4x sales, and ,7x enterprise value to revenue. Yep, NTAP has a ton of cash on their balance sheet, about $5 billion, or about 57% of their $7.4 billion market cap, or 47% net of their $1.5 billion in debt.
NTAP is headquartered in Sunnyvale, California, and has about 13,000 employees, and they are about 10 miles down the road from HPE. I suspect the Queen of Cost Cutting, M&A and Spin-offs (Meg Whitman) would love to get her hands on an asset like this. Or maybe relatively new CSCO CEO Chuck Robbins would like to get the party started with a $10 billion acquisition.
Who knows? It’s all pie in the sky sort of stuff, but let’s see what sort of results and guidance the company is able to give when they report after the close. I suspect some of the difficulties that enterprise hardware/storage peers have experienced in the March quarter will be evident in NTAP’s results, but who knows about their outlook.
The options market is implying about a 6% one day move following earnings, which is rich the 4 qtr avg one day move of about 4%, but basically in line with the 10 year average.
NTAP’s 17% gains from its May lows may discount any and all good news. $28 appears to be obvious technical resistance, the breakdown level from early January, where it topped out in March and the stock’s declining 200 day moving average:
So whats the trade?
We like the idea of having skin in the game over the Summer but not necessarily getting off-sides into earnings following this recent bounce. Therefore we will wait to see how the stock responds following tonight’s earnings earnings and guidance. For those with a fear of missing out on a move higher on earnings, a vertical calendar makes sense, with a longer term near the money call financed partially by the sale of a farther out of the money call more near term:
NTAP ($25.65) Buy the June 28call /Sept 26call vertical call calendar for 1.30
- Sell 1 June 28 call at .20
- Buy 1 Sept 26 call for 1.50
Break-evens on June expiration:
The ideal situation for this trade is a move at but not too far above 28 on June expiration at which point the June call can be closed or let to expire worthless and the Sept call can be further financed by rolling the short strike out and up.