Texas Instruments (TXN) Q2 Earnings Preview

by Dan July 25, 2016 1:26 pm • Commentary• Trade Ideas

Event: Texas Instruments (TXN) reports their Q2 results tonight after the close. The options market is implying about a 3.5% one day move tomorrow, which is shy of its 4.35% average over the last 4 quarters, but basically in line with its 10 year one day average post earnings move.

Price Action / Technicals: 

TXN is up a whopping 20% in 2016, and up 40% from its 2016 low made in mid January, and today making a new all time high.  The stock’s recent breakout is impressive as it proceeded the breakout in the SPX, and the Philadelphia Semi Index (SOX) which is only up 12% ytd:

[caption id="attachment_65245" align="aligncenter" width="600"]TXN 1yr chart from Bloomberg TXN 1yr chart from Bloomberg[/caption]

Taking a slightly longer term view, the stock looks mightily extended, with a pullback towards the recent breakout level very much in the cards on any disappointment in tonight’s results or guidance.  On a disaster (which is a very low probability outcome) or some sort of market panic like we saw last August, a re-tracement to the long term uptrend and the 2014 breakout near $50 would be where the stock found support:

[caption id="attachment_65244" align="aligncenter" width="600"]TXN 5yr chart from Bloomberg TXN 5yr chart from Bloomberg[/caption]

What to expect? Last week  Apple (AAPL) supplier Skyworks Solutions (SWKS) posted disappointing results and the stock declined 8% in one day Friday.  TXN, is a 10% customer of AAPL, and given the poor year to date performance of the stock, and what appears to be increasingly poor sentiment towards the September launch of the iPhone 7, that could weigh on TXN guidance.  The stock could also benefit from the company’s commitment to capital return (100% of their free cash flow), which last year resulting in $2.8 billion of shares repurchased and almost $1 billion in dividend’s, with a current yield of 2.3%.

Trading at an all time high, at 22x expected 2016 eps (growing 7% yoy), despite sales expected to decline 1% yoy (after being flat in 2015), with 85% of their sales coming from outside the U.S., I would not buy this stock here with your money.

So what’s the Trade? If there’s a guide down tonight by TXN, followed by disappointing guidance from AAPL (into what should be a strong seasonally period for AAPL), that could take the air out of component suppliers. And then a stock like TXN could clearly pullback to recent support.

If I were inclined to play for that I’d target earnings with August expiration, which also gives the AAPL scenario time to pay out:

Trade Idea: TXN ($66) Buy Aug 66/ 60 put spread for $1.50
  • Buy to open 1 Aug 66 put for 1.80
  • Sell to open 1 Aug 60 put at 30 cents

Break-even on Aug expiration: 

Profits: between 64.50 and 60 of up to 4.50 or 3x premium at risk, max gain of 4.50 below 60

Losses: up to 1.50 between 64.50 and 66, max loss of 1.50, or 2.3% above 66

Rationale:  With the stock at new all time highs, expectations are clearly high, despite possible headwinds to their outlook (moderating smartphone demand and strong dollar).  This trade offers a favorable defined risk, risk/ reward in an attempt to pick a top in a monster of a stock in 2016.